Question: Using the Single-Index Model, a security analyst has obtained the following estimates for stock A and stock B: stock alpha beta firm-specific standard deviation A

Using the Single-Index Model, a security analyst has obtained the following estimates for stock A and stock B:

stock alpha beta firm-specific standard deviation
A 3.8% 0.8 30%
B 4.2% 1.2 40%

The analyst also estimates that the market portfolio has an expected return of 10% and a standard deviation of 22%. The risk-free rate is 6%.

Suppose that we construct a portfolio W with 70% of proportion in stock A and 30% of proportion in stock B. Compute the following of portfolio W:

a) the excess return,

b) beta,

c) the firm-specific standard deviation,

d) the standard deviation.

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