Question: Assume that security returns are generated by the single-index model: R i = i + i R m + e i , where R i

Assume that security returns are generated by the single-index model:

R_i=_i + _iR_m + e_i,

where R_i is the return for security i, and R_m is the markets return. The risk-free rate is 3%. The standard deviation of market returns _m =0.20. Suppose also that there are three securities, X, Y, and Z, characterized by the following data:

Security	_i	E(R_i)	_ei
A	0.4	0.09	0.20
B	0.8	0.15	0.10
C	1.4	0.18	0.23

Calculate the variance of returns of securities X, Y, and Z.

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