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