Stock i Variance Correlation of i and Market 1 14% 0.70 2 16% 0.30 3 18%...

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Stock i Variance Correlation of i and Market 1 14% 0.70 2 16% 0.30 3 18% 0.20 Market 20% 1.00 Table 4 Average Alpha Market Returns Beta Systematic Unsystematic Risk Risk 1.45% 1.00% 0.80% 10% 1.00 (a) Calculate the market beta for stocks 1, 2, and 3. Detail all calculations that you use. (b) Using the single model, calculate systematic and unsystematic risk for stocks 1, 2, and 3. Detail all calculations that you use. (c) Using the single index model, calculate the expected returns for stocks 1, 2, and 3. Also, using the single index model, calculate the covariance between the returns of stock 1 and stock 2, and stock 1 and stock 3, respectively. Detail all calculations that you use. (d) Form a portfolio of stocks 1 and 2. Invest 75% in stock 1 and 25% in stock 2. Using the single index model, what are the expected return and standard deviation risk of this portfolio? Detail all calculations that you use. Stock i Variance Correlation of i and Market 1 14% 0.70 2 16% 0.30 3 18% 0.20 Market 20% 1.00 Table 4 Average Alpha Market Returns Beta Systematic Unsystematic Risk Risk 1.45% 1.00% 0.80% 10% 1.00 (a) Calculate the market beta for stocks 1, 2, and 3. Detail all calculations that you use. (b) Using the single model, calculate systematic and unsystematic risk for stocks 1, 2, and 3. Detail all calculations that you use. (c) Using the single index model, calculate the expected returns for stocks 1, 2, and 3. Also, using the single index model, calculate the covariance between the returns of stock 1 and stock 2, and stock 1 and stock 3, respectively. Detail all calculations that you use. (d) Form a portfolio of stocks 1 and 2. Invest 75% in stock 1 and 25% in stock 2. Using the single index model, what are the expected return and standard deviation risk of this portfolio? Detail all calculations that you use.

Answer rating: 100% (QA)

Answer a To calculate the market beta for stocks 1 2 and 3 we can use the formula Beta Covariancestock i market Variancemarket For stock 1 Covariance1 market Correlation1 market Standard Deviation1 St... View the full answer