Question: Suppose the CAPM Model is estimated using excess returns for portfolio G. The market excess return is 8% and the market variance is 100%. The

Suppose the CAPM Model is estimated using excess returns for portfolio G. The market excess return is 8% and the market variance is 100%. The portfolio-specific variance is 40%.

R_G = 1.5% +1.4 R_m +e_G

a) What is the total variance of the portfolio and the portfolio's systematic variance?

b) What is the covariance between the portfolio and the market index?

c) Suppose there is another portfolio (Z), where R_z = -1% +.8R_m +e_z. The portfolio specific variance of Z is 25%. Suppose we construct a portfolio (A) that has 70% in G and 30% in Z. Calculate portfolio A's alpha, beta, variance, systematic variance and portfolio-specific variance.

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