You estimate the market model for stocks i and j, using monthly returns. ri -...
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You estimate the market model for stocks i and j, using monthly returns.
ri - rf = 0.2%+ 0.7(rm - rf ) + ei
rj - rf = -0.8%+1.8(rm - rf ) + ej
Also =10% (the standard deviation of the market excess return), ,=10%, ,=15%.
a. If we draw Security Characteristic Lines (SCL) of stock i and
stock j, what are the intercept and slope of each SCL?
b. What is the systematic risk of stock i and stock j respectively?
c. What is the firm specific risk (namely unsystematic risk) of stock i
and stock j respectively?
d. What is the total risk of stock i and stock j respectively?
e. What fraction of stock is total variance can be diversified? What
fraction of stock js total variance can be diversified?
f. What is the covariance and correlation between stocks i and j?
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