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

Assume that security returns are generated by the single-index model, Ri = i + iRM + ei where Ri is the excess return for security i and RM is the markets excess return. The risk-free rate is 4%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security i E(Ri) (ei) A 0.7 10 % 30 % B 1.0 13 16 C 1.3 16 25 a. If M = 25%, calculate the variance of returns of securities A, B, and C.

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