value:
10.00 points
Assume that security returns are generated by the single-index model,
       Ri = αi + βiRM + ei
where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities AB, and C, characterized by the following data:
Security βi E(Ri) σ(ei)
A 1.2 12% 25%
B 1.3 13 11
C 1.4 14 20

a. If σM = 23%, calculate the variance of returns of securities AB, and C(Do not round intermediate calculations. Round your answers to the nearest whole number.)
Variance
  Security A [removed]
  Security B [removed]
  Security C [removed]

b. Now assume that there are an infinite number of assets with return characteristics identical to those ofAB, and C, respectively. What will be the mean and variance of excess returns for securities AB, andC(Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number. Omit the “%” sign in your response.)
Mean Variance
  Security A [removed] % [removed]
  Security B [removed] [removed]
  Security C [removed] [removed]

 

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