Please check my work for part A.

Please give as much explanation for part B as possible. I am not understanding

2. Assume that security returns are generated by the single index model

R_i = ai + B_iR_m + E_i

whereR_iis the excess return for security iand R_m is the market's excess return.Suppose also that there are three securities A, B, and C characterized by the following data:

Security Beta Expected Return SD² (E_i)

A 0.8 0.10 0.05

B 1.0 0.12 0.01

C 1.2 0.14 0.10

A.) (5 points) If SD²_m*=0.04 calculate the variance (e.g. the total risk) of returns of securities A, B, and C.

Unsystematic Risk =SD² (E_i)Total Risk = Unsystematic + Systematic

A = 0.05 + 0.025 = 0.0765

Systematic Risk = SD²_m* B² B= 0.01 + 0.04= 0.05

A = 0.04 * (0.8)² = 0.025 C = 0.10 + 0.0576 = 0.1576

B = 0.04 * (1.0)² = 0.04

C = 0.04 * (1.2)² = 0.0576

B.) (5 points) Now assume there are an infinite number of assets with the 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 variance of the portfolio's return? Similarly, what will the variance of the portfolio's return for portfolios formed only from type B? type C?