Q1

Consider the two (excess return) index model regression results for A and B:

R_A = 1.1% + 0.95R_M

R-square = 0.488

Residual standard deviation = 9.2%

R_B = 0.4% + 1.4R_M

R-square = 0.576

Residual standard deviation = 12.5%

If r_f were constant at 8% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal place.)

Intercept ______ %

Q2

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

R_A = 2.8% + 1.00R_M + e_A

R_B = 1% + 1.3R_M + e_B

_M = 18%; R-square_A = 0.27; R-square_B = 0.13

Assume you create portfolio P with investment proportions of 0.70 in A and 0.30 in B.

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

Standard deviation 33.82

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

NEED HELP FOR 3 AND 4

Portfolio beta 1.09

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

Firm-specific

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

Covariance