Question: Assume that security returns are generated by the single-index model, Ri - Qi + BiRM + ei where Ri is the excess return for security

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

Assume that security returns are generated by the single-index model, Ri - Qi + BiRM + ei where Ri is the excess return for security i and RM is the market's 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 B Bi 0.9 1.3 1.7 E(Ri) 88 12 16 (ei) 17% 8 11 a. If om=12%, 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. If one forms a well-diversified portfolio of type A securities, what will be the mean and variance of the portfolio's excess returns? What about portfolios composed only of type B or C stocks? (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.) Mean Variance Security A Security B Security C

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