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1:Suppose that the excess return for all securities can be described by a single index...

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Finance

1:Suppose that the excess return for all securities can be described by a single index model: Ri = i + iRm + ei

The standard deviation of the market portfolio is 18%. Data for securities A, B and C are presented in the table below:

Security i E(Ri) (ei)
A 0.4 11% 27%
B 1.2 13% 15%
C 1.3 13% 10%

Suppose that an investor forms a well-diversified portfolio of type A securities. What would be the variance of the portfolio's excess return, assuming there is an infinite number of securities with return characteristics which are identical to the characteristics of security A?

2:

Assume that the single index model is valid. You've collected the following information about excess returns for two stocks, A and B, their residual standard deviations, and the standard deviation of the macroeconomic factor, M:

  • RA = -0.1 + 0.8 RM + eA
  • RB = 0.2 + 1.5 RM + eB
  • (eA) = 0.4
  • (eB) = 0.2
  • M = 0.26

Attempt 1/10 for 10 pts.

Part 1

What is the standard deviation of stock A?

Part 2

What is the standard deviation of stock B?

Submit

What is the covariance between the returns on stocks A and B?

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