Question: Require help working out two questions from a sample past paper from 2019 Macquarie for Applied Finance Management 1. [5 marks] Consider stocks A and

Require help working out two questions from a sample past paper from 2019 Macquarie for Applied Finance Management

from 2019 Macquarie for Applied Finance Management 1. [5 marks] Consider stocks

1. [5 marks] Consider stocks A and B whose rates of return having the following characteristics: Stock Beta Residual Variance Total Variance A 0.5 0.04 0.0625 B 1.5 0.08 0.2825 a) Suppose an equally weighted portfolio of A and B is formed. What is the residual variance of the portfolio assuming a single factor model? [1] b) What is the variance of the portfolio in (a) assuming the single factor model? (Hints: You need to find the variance of the market portfolio.) [4]

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