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Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

RA = 3.5% + 0.65RM + eA

RB = -1.6% + 0.8RM + eB

σM = 21%; R-squareA = 0.22; R-squareB = 0.14

Assume you create portfolio P with investment proportions of 0.60 in A and 0.40 in B.

A) What is the firm-specific variance of your portfolio?

B) What is the covariance between the portfolio and the market index?

Financial Management, Finance

  • Category:- Financial Management
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