Problem 8-14 Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA 4.08 + 0.50RM + A RB-1.28 + 0.70RM + eB OM 178; R-squareд = 0.26; R-squareg = 0.18 Assume you create a portfolio Q, with investment proportions of 0.40 in a risky portfolio P, 0.35 in the market index, and 0.25 in T-bill. Portfolio P is composed of 70% Stock A and 30% Stock B. a. What is the standard deviation of portfolio Q? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. 10.98 % Standard deviation c. What is the "firm-specific" risk of portfolio Q? (Calculate using numbers in decimal form, not percentages. Do not round intermediate calculations. Round your answer to 4 decimal places.) Answer is complete but not entirely correct. Firm-specific 0.0025

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A: The given problem can be solved using Capital asset pricing model.

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A: 1) Computation:

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A: The question gives the following information:

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A: Given:

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Q: 4m

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A: Here,

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Q: What is the expected return for stock A?

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Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.