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How does the single-index model improve on the traditional

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Reference no: EM132984887

You are considering making additional investments, and have gathered data about two risky stocks:

Stock Expected Return Beta Firm-Specific Standard Deviation

CVX: Expected Return=11.5 % Beta=1.10 Firm specific st. dev.=24%

Forsythe Inc.: Expected Return=16 % Beta=.75 Firm specific st. dev.=28%

Assumptions: The expected market return (as measured by the S&P 500 Index) is 10%. The standard deviation of the S&P 500 Index is 15%.

Problem a. Calculate the standard deviation (i.e. the total risk) of CVX.

Problem b. Calculate the standard deviation (i.e. the total risk) of Forsythe.

Problem c. Calculate the covariance between the two stocks.

Problem d. Calculate the correlation between the two stocks.

Problem e. How does the single-index model improve on the traditional Markowitz approach to creating portfolios?

Reference no: EM132984887

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