Suppose the market index has a standard deviation of 0.40 and the riskless rate is 5 % . You are given the following information about two stocks X and Y : , and . R=[10%,20%] Cov * (RX, RMarket) = 0.096 Cov * (RY, RMarket) = 0.240 Suppose firm - specific errors are independent and identically distributed with a mean of zero and standard deviation of 0.5 . a ) What are the standard deviations of stocks X and Y ? b ) You were to construct a portfolio P with the following proportions : 20 % in Stockx , 50 % in Stock Y , and 30 % in T - bills . Find the market return and the beta of portfolio P.

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B. Suppose your boss askes you to analyze the portfolios having the following characteristics. Observed return Beta Residual SD 1.8 2.6 Portfolio A B 18% 24% 0.04 0.06 The return on the market portfolio is 0.14. The risk free rate is 0.07. The standard deviation of the market portfolio is 0.02. What advice would you give your boss regarding these two independent investment opportunities? B. Suppose your boss askes you to analyze the portfolios having the following characteristics. Observed return Beta Residual SD 1.8 2.6 Portfolio A B 18% 24% 0.04 0.06 The return on the market portfolio is 0.14. The risk free rate is 0.07. The standard deviation of the market portfolio is 0.02. What advice would you give your boss regarding these two independent investment opportunities?

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a Standard deviation of firmspecific error 05 Standard deviation of marke... View the full answer