Suppose that the excess return for all securities can be described by a single index model R i i i R m e i The standard deviation of the market portfolio is 18 Data for securities A, B and C are presented in the table below Security i E(R i ) (e i ) A 0 7 12 24 B 1 2 14 15 C 1 3 13 10 Part 1 Suppose that an investor forms a well diversified portfolio of type A securities What would be the variance of the portfolio's excess return, assuming there is an infinite number of securities with return characteristics which are identical to the characteristics of security A

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Question: Suppose that the excess return for all securities can be described by a single index model: R i = i + i R m +

Suppose that the excess return for all securities can be described by a single index model: R_i = _i + _iR_m + e_i

The standard deviation of the market portfolio is 18%. Data for securities A, B and C are presented in the table below:

Security	_i	E(R_i)	(e_i)
A	0.7	12%	24%
B	1.2	14%	15%
C	1.3	13%	10%

Part 1

Suppose that an investor forms a well-diversified portfolio of type A securities. What would be the variance of the portfolio's excess return, assuming there is an infinite number of securities with return characteristics which are identical to the characteristics of security A?

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