Assume that security returns are generated by the single-index model, Ri = ?i + ?iRM + ei where Ri...

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Assume that security returns are generated by the single-indexmodel,
R_i = ?_i +?_iR_M + e_i

where R_i is the excess return for securityi and R_M is the market’s excessreturn. The risk-free rate is 3%. Suppose also that there are threesecurities A, B, and C, characterized bythe following data:
Security ?_i E(R_i) ?(e_i)
A 1.0 10 % 23 %
B 1.3 13 9
C 1.6 16 18
a. If ?_M = 20%, calculatethe variance of returns of securities A, B, andC.
A:
B:
C:
b. Now assume that there are an infinite numberof assets with return characteristics identical to those ofA, B, and C, respectively. What will bethe mean and variance of excess returns for securities A,B, and C? (Enter thevariance answers as a percent squared and mean as a percentage. Donot round intermediate calculations. Round your answers to thenearest whole number.)
Mean Variance
A:
B:
C:

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Assume that security returns are generated by the single-indexmodel,Ri = ?i +?iRM + eiwhere Ri is the excess return for securityi and RM is the market’s excessreturn. The risk-free rate is 3%. Suppose also that there are threesecurities A, B, and C, characterized bythe following data:Security?iE(Ri)?(ei)A1.010%23%B1.3139C1.61618a. If ?M = 20%, calculatethe variance of returns of securities A, B, andC.A:B:C:b. Now assume that there are an infinite numberof assets with return characteristics identical to those ofA, B, and C, respectively. What will bethe mean and variance of excess returns for securities A,B, and C? (Enter thevariance answers as a percent squared and mean as a percentage. Donot round intermediate calculations. Round your answers to thenearest whole number.)Mean VarianceA:B:C: