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

RA = 1.6% + 0.70RM + eA
RB = -1.8% + 0.90RM + eB
sM = 22%; R-squareA = 0.20; R-squareB = 0.15

Assume you create a portfolio Q, with investment proportions of 0.40 in a risky portfolio P, 0.35 in the market index, and 0.25 in T-bill. Portfolio P is composed of 70% Stock A and 30% Stock B.

1. What is the standard deviation of portfolio Q? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Standard deviation %

2. What is the beta of portfolio Q? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Portfolio beta

3. What is the "firm-specific" risk of portfolio Q?(Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 4 decimal places.)

Firm-specific

4. What is the covariance between the portfolio and the market index? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Covariance

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92846210

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