2. Suppose that the market model for stocks A and B is estimated with the following results: RA = 1% +0.9*RM+EA RB = -2% + 1.1*RM+EB The standard deviation of the markets returns is 20% and firm specific risk (standard deviation) equals 30% for A and 10% for B. a. Compute the risk (standard deviation) of each stock and the covariance between them. b. Suppose we form an equally weighted portfolio of stocks A and B. What will be the nonsystematic standard deviation of that portfolio?

2. Suppose that the market model for stocks A and B is estimated with the following results: RA = 1% +0.9RM+EA RB = -2% + 1.1RM+EB The standard deviation of the markets returns is 20% and firm specific risk (standard deviation) equals 30% for A and 10% for B. a. Compute the risk (standard deviation) of each stock and the covariance between them. b. Suppose we form an equally weighted portfolio of stocks A and B. What will be the nonsystematic standard deviation of that portfolio?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 1P

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