Question

Assume that security returns are generated by the single-index model, Ri-ai + BiR + where R is the excess return for security i and Ry is the market's excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security Bi A 1.5 B 1.7 C 1.9 E(Ri) 68 B 10 (0) 296 15 24 a. If Oy -26%, calculate the variance of returns of securities A, B, and C. Variance Security A Security B Security C b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and respectively What will be the mean and variance of excess returns for securities A B and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round Intermediate calculations. Round your answers to the nearest whole number.) Mean Variance Security A Security B Security C

Answer 1

cokulatiom of (a) 2N variance daclin variance Ca) - P +ce) for Security A R6)+ 29 A 1521 + 841 30 3362 m26.iven m the uestion and eror term = G (E ) 211. the for Security B 500 (-126 + is 1953.64 + 2s ) 2 for Se Curity 2 t24 2440.36t 516 s913 3016-36

b I there are an infinite humber of denti Cal character stics with assets waa-diversified Portfelio of Ryyematic otemakic with Large n en willeual that of then a each tpe will have the risk non- Since rislo will approach 2e70 The the 1ndividlal (Ldan ti cal tocks) Stocks Securit arian ce is fore This part will be Come 2era beCause This epre sents un-ystema tic risk 15a1 CA =1.5 26 1-726 (953.69 a440.36 - 1.9 26 2 Mean A: 6.1. Jndividuual veturns Fiven in auection