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  3. b. suppose the index model for stocks a and b is e

b. Suppose the index model for stocks A and B is estimated from excess returns...

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b. Suppose the index model for stocks A and B is estimated from excess returns with the following results: RA = 3% +0.7RM + en Rp = -2% + 1.2RM + eb OM = 20%; RSquared A = 0.20; RSquaredp = 0.12 Assuming the residuals of the index models are independent of each other, what are the covariance and the correlation coefficient between the two stocks? [4 marks]

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