Assume that the following results are the index model for stock A and B estimated from the excess returns with and risk=standard deviation.
Significance level for the coefficient is 90% confidence interval
Stock A
Stock B
Alpha
1%
1.30%
alpha P-value
1.00%
8.00%
Beta
0.5
0.8
beta P-value
1.00%
0.00%
firm specific risk
18%
22%
weights in P (arbitrary)
60%
40%
Market risk is 18% and market expected return is 5%. Given that the market expected excess return of 5%, what are the expected excess returns of stock A and B? What is the total risk for each stock? Which stock would you choose if you were to take an active position, , A or B? Why? What is the covariance between each stock and the market index and between the two stocks? For Portfolio P with investment proportions of 0.6 in A and 0.4 in B, what is the covariance of portfolio P with the market index?
