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[answered] Assume that security returns are generated by the single-in


Assume that security returns are generated by the single-index model,


???????Ri?=??i?+??iRM?+?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?A,?B, and?C, characterized by the following data:


Security ?i E(Ri) ?(ei)
A 0.8 10% 25%
B 1.0 12 ?? 10 ??
C 1.2 14 ?? 20 ??


a. If??M?= 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 ??
??Security?B ??
??Security?C ??


b.

Now assume that there are an infinite number of assets with return characteristics identical to those of?A,?B, and?C, respectively. What will be the mean and variance of excess returns for securities?A,?B, and?C??(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 ?%? ??
??Security?B ?%? ??
??Security?C ?%? ??


 


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