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 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 A and stock B?
c. What is the covariance between stock B and the index?
d. Break down the variance of stock B into its systematic and firm-specific components.