Question: Problem 10-8 Assume that security returns are generated by the single-index model, Ri= ai + BiRM + ei where R is the excess return for

Problem 10-8 Assume that security returns are generated by the single-index

Problem 10-8 Assume that security returns are generated by the single-index model, Ri= ai + BiRM + ei where R is the excess return for security i and Ry is the market's excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C characterized by the following data: Security Bj A 1.2 B 1.3 C 1.4 E(Ri) (ei) 11% 20% 12 11 13 14 a. If om = 16%, calculate the variance of returns of securities A, B, and C. Variance 0 Security A Security B Security C b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.) Variance Mean % Security A Security B Security C % %

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