Intro

Suppose that the excess return for all securities can be

described by a single index model:

$R_i=a_i+{}_i{R}_m+e_i$

The standard deviation of the market portfolio is $18\%.$ Data for

securities A$,$ B and C are presented in the table below:

Part $1$

What is the variance of returns on security $B?$

Part $2$

Suppose that an investor forms a well$-$diversified portfolio of

type A securities$.$ What would be the variance of the portfolio's

excess return, assuming there is an infinite number of

securities with return characteristics which are identical to the

characteristics of security A$?$