The data below describe a three stock financial market that satisfies the single index model.
|
Stock |
Capitalization |
Beta |
Mean Excess Return |
Standard Deviation |
|
A |
$3,000 |
1.0 |
10% |
40% |
|
B |
$1,940 |
0.2 |
2 |
30 |
|
C |
$1,360 |
1.7 |
17 |
50 |
The single factor in this economy is perfectly correlated with the value weighted index of the stock market. The standard deviation of the market index portfolio is 25%.
a. What is the mean excess return of the index portfolio?
b. What is the covariance between stock B and the index?
c. Break down the variance of stock B into its systematic and firm specific components.