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

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Statistics

Suppose that the index model for two Canadian stocks HD and MLis estimated with the following results:

RHD=0.02+0.80RM+eHD

R-squared =0.6

                 RML =-0.03+1.50RM+eML

R-squared =0.4

?M =0.20

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

  1. What is the standard deviation of each stock? (Hint:bi = (?iM ?i) /?M.)
  2. What is the systematic risk of each stock?
  3. What are the covariance and correlation coefficient between HDand ML?
  4. For portfolio P with investment proportion of 0.3 in HD and 0.7in ML, calculate the systematic risk, non-systematic risk and totalrisk of P.

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