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

RA = 3% + 0.7RM + eA

RB = -2% + 1.2RM + eB

M = 20%; R-squareA = 0.20; R-squareB = 0.12

a) What is the standard deviation of each stock?

b) Break down the variance of each stock to the systematic and firm-specific components.

c) What are the covariance and correlation between the two stocks?

d) What is the covariance between each stock and the market index?

e) Anoter portfolio A has investment proportions of 0.58 in R and 042 in B compute

i) the standard deviation of the portfolio A

f) Portfolio B has investments of 0.55 in A, 0.25 in market index and and 0.3 in TY-bills.

I) compute the standar deviation of portfolio B

ii) Breakdown the variance of Portfolio B into systematic and and firm specific risk