Infinite number of assets with return characteristics

Reference no: EM13751659

Problem: Assume that security returns are generated by the single index model.

R_{i =}α_i = βR_M+ e_i

Where R_iis theexcess return for security _i and R_mis the market's excess return. The risk free rate is 4% 3

Suppose also that there are three securities A, B, and C, characterized by the following data.

Security	β_i	E(R_i)	Α (e_i)
A	0.8	15%	24%
B	1.1	18	15
C	1.4	21	18

a. If σ_M= 20%, calculate the variances of return of securities A, B, and 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 return for securities A, B and C?

Reference no: EM13751659

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