Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA= 2.60% + 0.90RM + eARB= -2.00% + 1.20RM + eBOM = 26%; R-squarea = 0.21; R-squareg = 0.12Assume you create portfolio P with investment proportions of 0.70 in A and 0.30 in B. c. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimalplaces.)Firm-specificd. What is the covariance between the portfolio and the market index? (Do not round your intermediate calculations. Round youranswer to 3 decimal places.)Covariance

Given: Constant Beta Standard deviation Proportions A 2.60% 0.9 21% 0.7 B -2.00% 1.2 12%…

Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 2.60% + 0.90RM + eA RB = -2.00% + 1.20RM + eB OM = 26%; R-squarea = 0.21; R-squareg = 0.12 Assume you create portfolio Pwith investment proportions of 0.70 in A and 0.30 in B.

Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 2.60% + 0.90RM + eA RB = -2.00% + 1.20RM + eB OM = 26%; R-squarea = 0.21; R-squareg = 0.12 Assume you create portfolio Pwith investment proportions of 0.70 in A and 0.30 in B.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Stock Market Indices

Stock indexes are used to compare the price fluctuations of a group of stocks of similar companies, which are combined based on a similar industry or a particular market capitalization limit or type of market. The price comparison is based on a pre-determined standard method or indicators. These stock indexes are usually considered a base for comparison of a particular stock, and the performance of that particular company can be easily determined.

Question

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA
= 2.60% + 0.90RM + eA
RB
= -2.00% + 1.20RM + eB
OM = 26%; R-squarea = 0.21; R-squareg = 0.12
Assume you create portfolio P with investment proportions of 0.70 in A and 0.30 in B.

c. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimal
places.)
Firm-specific
d. What is the covariance between the portfolio and the market index? (Do not round your intermediate calculations. Round your
answer to 3 decimal places.)
Covariance

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b) Suppose that you observe the following information in Table 2 for stocks A and B: Table 2 Expected Return (%) 11% Stock Beta A 0.8 В 14% 1.5 The risk-free rate of return is 6% and the expected rate of return on the market index is 12%. Using the Single-Index Model, calculate the alpha of both stocks. Show your calculations. Explain what the alpha of the single-factor model represents and interpret your results.
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 2.60% + 0.90RM + eA RB = -2.00% + 1.20RM + eB OM = 26%; R-squarea = 0.21; R-squareg = 0.12 Assume you create portfolio P with investment proportions of 0.70 in A and 0.30 in B.
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