Q#10: Chapter 08: The index model has been estimated for stocks A and B with the following results:RA= 0.01 +0.5RM + eA.RB = 0.02 + 1.3RM + eB.OM = 0.25; σ(EA) = 0.20; σ(eB) = 0.10.a.b.The covariance between the returns on stocks A and B isThe standard deviation for stock A isThe standard deviation for stock B isC.d. Discuss the advantages of the single-index model over the Markowitz model.

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Answered: Q#10: Chapter 08: The index model has…

Q#10: Chapter 08: The index model has been estimated for stocks A and B with the following results: RA= 0.01 +0.5RM + eA. RB 0.02 + 1.3RM + eB. JM = 0.25; σ(еA) = 0.20; σ(es) = 0.10.

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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Question

Q#10: Chapter 08: The index model has been estimated for stocks A and B with the following results:
RA= 0.01 +0.5RM + eA.
RB = 0.02 + 1.3RM + eB.
OM = 0.25; σ(EA) = 0.20; σ(eB) = 0.10.
a.
b.
The covariance between the returns on stocks A and B is
The standard deviation for stock A is
The standard deviation for stock B is
C.
d. Discuss the advantages of the single-index model over the Markowitz model.

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The index model has been estimated for stocks A and B with the following results: RA = 0.12 + 0.610RM + eA RB = 0.04 + 1.416RM + eB σM = 0.270 σ(eA) = 0.20 σ(eB) = 0.10 What is the covariance between each stock and the market index?
The index model has been estimated for stock A with the following results: RA = 0.01 + 1.2RM + eA. σM = 0.15; σ(eA) = 0.10. The standard deviation of the return for stock A is
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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. Suppose we form an equally weighted portfolio of stocks A and B. What will be the nonsystematic standard deviation of that portfolio? b.
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