Question: Problem 2. Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3.00% +

Problem 2. Suppose that the index model for stocks A and

Problem 2. Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3.00% + 1.05RM + en RB = -1.20% + 1.20RM + eb and Om = 29%; R-squareda = 0.29; R-squaredz = 0.14 Assume you create portfolio P with investment proportions of 0.60 in A and 0.40 in B. a) What is the standard deviation of the portfolio? (Hint: R-squared is the variance explained by the market risk B2o divided by the variance in the stock o.] b) What is the beta of the portfolio? c) What is the firm-specific variance of the portfolio? (Round to 3 decimals.) d) What is the covariance between the portfolio and the market index? (Round to 3 decimals.)

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