Assume that security returns are generated by the single index model, R i i i R M e i where R i is the excess return for security i and R M is the markets excess return The risk free rate is 3 Suppose also that there are three securities A , B , and C , characterized by the following data Security i E(R i ) (e i ) A 1 2 11 20 B 1 3 12 11 C 1 4 13 14 a If M 16 , calculate the variance of returns of securities A , B , and C (Do not round intermediate calculations Round your answers to the nearest whole number ) Variance Security A Security B Security C b Now assume that there are an infinite number of assets with return characteristics identical to those of A , B , and C , respectively What will be the mean and variance of excess returns for securities A , B , and C ( Enter the variance answers as a percent squared and mean as a percentage Do not round intermediate calculations Round your answers to the nearest whole number Omit the sign in your response ) Mean Variance Security A Security B Security C

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

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

R_i = _i + _iR_M + e_i

where R_i is the excess return for security i and R_M is the markets excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data:

Security	_i	E(R_i)	(e_i)
A	1.2	11%	20%
B	1.3	12%	11%
C	1.4	13%	14%

If _M = 16%, calculate the variance of returns of securities A, B, and C. (Do not round intermediate calculations. Round your answers to the nearest whole number.)

	Variance
Security A
Security B
Security C

Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number. Omit the "%" sign in your response.)

	Mean	Variance
Security A
Security B
Security C

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