Question: 1.You observe that the average return for three stocks A,B and C is 7%, 9% and 13%, respectively , and you find that when regressing

1.You observe that the average return for three stocks A,B and C is 7%, 9% and 13%, respectively , and you find that when regressing the stock returns on a zero-mean random variable X you find:

r(A) = 0.07+0.5X+u(A)

r(B)= 0.09+1.0X+u(B)

r(C)= 0.13+2.0X+u(C)

Where r(i) and c(i) are the returns and the regression residuals on stock i=A,B,C respectively.

(a)Find variance of each asset and covariance between, the risk free rate and the return on pure tracking portfolio of factor X.

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