Question: Problem 1: The index model has been estimated for stocks A and B with the following results: R A = -0.06 + 0.85R M +

Problem 1:

The index model has been estimated for stocks A and B with the following results: R_A= -0.06 + 0.85R_M+ e_A R_B= 0.03 + 2.95R_M+ e_B

The standard deviation of the market index is 18%; the residual standard deviation of the error terms for stock A is 44%; the residual standard deviation of the error terms for stock B is 35%. What is the covariance between the returns on stocks A and B? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Problem 2: Using the data from problem 1, what is your best estimate of the total variance of the excess returns on stock A? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

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