Problem 1. You are given the following information: the variance of the rate of return on...

 

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Problem 1. You are given the following information: the variance of the rate of return on stock 1, stock 2, and the market portfolio are, o? = 0.16, o2 = 0.09, and o= 0.04. The covariances between these assets are 01,2 = 0.02, 01,M = 0.064, and 02,M= 0.032. Consider forming a portfolio that has 75% invested in asset 1 and 25% invested in asset 2. Call this portfolio P. (a) What is the variance of portfolio P? (b) What are the betas of 1, 2, and P relative to the market (i.e. what are B₁,M, B2,M, and BP,M)? (c) What are the R2 values in regressions of the return on 1, 2, and P on the market portfolio? Problem 1. You are given the following information: the variance of the rate of return on stock 1, stock 2, and the market portfolio are, o? = 0.16, o2 = 0.09, and o= 0.04. The covariances between these assets are 01,2 = 0.02, 01,M = 0.064, and 02,M= 0.032. Consider forming a portfolio that has 75% invested in asset 1 and 25% invested in asset 2. Call this portfolio P. (a) What is the variance of portfolio P? (b) What are the betas of 1, 2, and P relative to the market (i.e. what are B₁,M, B2,M, and BP,M)? (c) What are the R2 values in regressions of the return on 1, 2, and P on the market portfolio?