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The index model has been estimated for stocks A and B with the following results:

R_A = 0.01 + 0.5R_M + e_A R_B = 0.02 + 1.3R_M + e_B Standard deviation of the market return s_M = 0.25 Standard deviation of firm specific return for stock A s(e_A) = 0.20

Standard deviation of firm specific return for stock B s(e_B) = 0.10

Use the above information to answer this and the next 6 questions.

Consider the following statements.

I. The standard deviation of the return for stock A is 0.2539.

II. The standard deviation of the return for stock B is 0.3400.

Question 4

I. The firm-specific variance of stock A returns is 0.04.

II. The systematic variance of stock B returns is 0.1056.

Question 4 Which of the following is correct?

a.Statements I and II are both incorrect.

b.Statements I and II are both correct.

c.Statement I is correct, Statement II is incorrect.

d.Statement I is incorrect, Statement II is correct

Question 5

Consider the following statements.

I. The covariance between the returns on the two stocks is 0.2016.

II. The correlation coefficient between the returns on the two stocks is 0.5065.

Which of the following is correct?

a.Statements I and II are both incorrect.

b.Statements I and II are both correct.

c.Statement I is correct, Statement II is incorrect.

d.Statement I is incorrect, Statement II is correct.