2023 7 value 10 00 points Assume that security returns are generated by the single index model R i
Business & Finance 2023 7. Assume That Security
7 value 10 00 points Assume that security returns are generated by the single index model R i 2023
10.00 points
| Assume that security returns are generated by the single-index model, |
| Ri = αi + βiRM + ei |
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where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 4%. Suppose also that there are three securities A, B, and C, characterized by the following data: |
| Security | βi | E(Ri) | σ(ei) |
| A | 0.8 | 15% | 24% |
| B | 1.1 | 18 | 15 |
| C | 1.4 | 21 | 18 |
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| a. | If σM = 20%, calculate the variance of returns of securities A, B, 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] |
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| b. |
Now assume that there are an infinite number of assets with return characteristics identical to those ofA, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, 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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