Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3.6% + 1.20RM + eARB = -1.6% + 1.50RM + eBOM = 16%; R-squareд = 0.25; R-squarep = 0.15What is the covariance between each stock and the market index?Note: Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation isprovided as 20%. Do not round your intermediate calculations. Round your answers to nearest whole number.Stock AStock BCovariance

Stock market:The stock market is a dynamic financial marketplace where buyers and sellers trade…

Answered: Suppose that the index model for stocks…

Suppose that the index model for stocks A and B is est RA= 3.6% + 1.20 RM + eA RB 1.6 % + 1.50RM + eB OM 16%; R-squareд = 0.25; R-squareg = 0.15

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Stock Market Indices

Stock indexes are used to compare the price fluctuations of a group of stocks of similar companies, which are combined based on a similar industry or a particular market capitalization limit or type of market. The price comparison is based on a pre-determined standard method or indicators. These stock indexes are usually considered a base for comparison of a particular stock, and the performance of that particular company can be easily determined.

Question

Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 3.6% + 1.20RM + eA
RB = -1.6% + 1.50RM + eB
OM = 16%; R-squareд = 0.25; R-squarep = 0.15
What is the covariance between each stock and the market index?
Note: Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is
provided as 20%. Do not round your intermediate calculations. Round your answers to nearest whole number.
Stock A
Stock B
Covariance

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