Suppose that the index model for stocks a and b is, Ask an Expert

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

R_A = 3.5% + 0.65RM + eA

R_B = -1.6% + 0.8RM + eB

σ_M = 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?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92724953

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