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Suppose that the index model for two Canadian stocks HD and ML is estimated with the following


RHD =0.02+0.80RM+eHD

R-squared =0.6

               RML =-0.03+1.50RM+eML

R-squared =0.4

σM =0.20

where M is S&P/TSX Comp Index and RX is the excess return of stock X. 

1.      What is the standard deviation of each stock? (Hint: bi = (ρiM σi) / σM.)

2.      What is the systematic risk of each stock?

3.      What are the covariance and correlation coefficient between HD and ML?

4.      For portfolio P with investment proportion of 0.3 in HD and 0.7 in ML, calculate the systematic risk, non-systematic risk and total risk of P. 

Top Answer

1.Standard deviation of stock HD is 20.656% Standard deviation of stock ML is 47.434% 2.Systematic... View the full answer


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