Suppose that the index model for stocks A and B is estimated from excess returns

Question

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

Assume you create a portfolio Q, with investment proportions of 0.50 in a risky portfolio P, 0.30 in the market index, and 0.20 in T-bill. Portfolio P is composed of 60% Stock A and 40% Stock B.

What is the standard deviation of portfolio Q? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

What is the beta of portfolio Q? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What is the "firm-specific" risk of portfolio Q? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 4 decimal places.)

What is the covariance between the portfolio and the market index? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

Explanation / Answer

Solution:-

1. Standard deviation 21.55 ± 0.01%

2. Portfolio beta 0.75 ± 0.0001

3. Firm­specific 0.0239 ± 0.00001

4. Covariance 0.03 ± 0.0001

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