Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 3.5% + 0.65RM + eA
RB = -1.6% + 0.8RM + eB
σM = 21%; R-squareA = 0.22; R-squareB = 0.14
Assume you create portfolio P with investment proportions of 0.60 in A and 0.40 in B.
What is the standard deviation of the portfolio?