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Estimate of the standard deviation

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The index model has been estimated for stocks A and B with the following results:

RA= -0.06 + 0.85RM+ eA

RB= 0.03 + 2.95RM+ eB

The standard deviation of the market index is 18%; the residual standard deviation of the error terms for stock A is 44%; the residual standard deviation of the error terms for stock B is 35%.

You want to form a complete portfolio with 40% invested in Stock A, 45% invested in Stock B, and 15% invested in a risk-free asset with expected return of 3%, beta of 0, and residual standard deviation of 0%. Using the Index Model, what is your estimate of the standard deviation of this complete portfolio?

Reference no: EM132801987

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