Suppose that the index model for two Canadian stocks HD and MLis estimated with the following results:
RHD=0.02+0.80RM+eHD
R-squared =0.6
RML =-0.03+1.50RM+eML
R-squared =0.4
?M =0.20
where M is S&P/TSX Comp Index and RX is theexcess return of stock X.
- What is the standard deviation of each stock? (Hint:bi = (?iM ?i) /?M.)
- What is the systematic risk of each stock?
- What are the covariance and correlation coefficient between HDand ML?
- For portfolio P with investment proportion of 0.3 in HD and 0.7in ML, calculate the systematic risk, non-systematic risk and totalrisk of P.
