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Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 1.8% + 0.75RM + eA
RB = -2.0% + 1.1RM + eB
σM = 23%; R-squareA = 0.18; R-squareB = 0.10
Assume you create portfolio P with investment proportions of 0.60 in A and 0.40 in B.
a. What is the standard deviation of the portfolio? (Do not round your intermediate calculations. Round your answer to 2 decimal places.)
Standard Deviation %
b. What is the beta of your portfolio? (Do not round your intermediate calculations. Round your answer to 2 decimal places.)
Portfolio Beta
c. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimal places.)
Firm-Specific
d. What is the covariance between the portfolio and the market index? (Do not round your intermediate calculations.Round your answer to 3 decimal places.)
Covariance
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