Question: Problem 8-13 Suppose that the index model for stocks A and B is estimated from excess returns with the following results: R A = 3.80%

Problem 8-13

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:

R_A = 3.80% + 1.25R_M + e_A

R_B = -1.80% + 1.60R_M + e_B

_M = 18%; R-square_A = 0.24; R-square_B = 0.18

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? (Do not round your intermediate calculations. Round your answer to 2 decimal places.)

b. What is the beta of your portfolio? (Do not round your intermediate calculations. Round your answer to 2 decimal places.)

c. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimal places.)

d. What is the covariance between the portfolio and the market index? (Do not round your intermediate calculations. Round your answer to 3 decimal places.)

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