Suppose that the index model for stocks A and B is estimated from excess returns with the following results: R₁ = 2.00% + 1.10RM +eA RB = -0.60% +0.90RM + eB The R-squared of the estimate for stock A is 0.35 and the R-squared of the estimate for stock B is 0.40. The standard deviation of the market is OM = 30%. Assume you create portfolio P with weights of 120% in A and -20% in B. These weights mean that you go long stock A and short stock B.

Suppose that the index model for stocks A and B is estimated from excess returns with the following results: R₁ = 2.00% + 1.10RM +eA RB = -0.60% +0.90RM + eB The R-squared of the estimate for stock A is 0.35 and the R-squared of the estimate for stock B is 0.40. The standard deviation of the market is OM = 30%. Assume you create portfolio P with weights of 120% in A and -20% in B. These weights mean that you go long stock A and short stock B.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

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