Question: 5) Suppose that the Index Model for the excess returns of stocks A and B is estimated with the following results: RA = 0.01 +

5) Suppose that the Index Model for the excess returns of stocks A and B is estimated with the following results:

RA = 0.01 + 0.80 * Rm + eA

RB = -0.02 + 1.5 * Rm + eB

Stdev(Rm)=0.25

Stdev(eA)=0.40

Stdev(eB)=0.20

What is the Standard Deviation of each Stock?

What is the Covariance between Stock A and Stock B?

What is the Correlation between Stock A and Stock B?

6) Suppose we form an equal weighted portfolio between Stock A and Stock B (from Q5 above). What will be the non-systematic standard deviation of that portfolio?

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