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
firm specific risk
weights in P (arbitrary)
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?