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