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What is the covariance between each stock and market index

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Suppose the index model for stocks 1 and 2 is estimated from the excess returns with the following results:r1 M12M = 2%+0.6R +e, r = 2%+1.2R +e2, σM = 25%, and the regression R2 of stocks 1 and 2 is 0.25 and 0.20, respectively.

Answer the following questions.

Problem (a) What is the variance of each stock?

Problem (b) What is the firm-specific risk of each stock?

Problem (c) What is the covariance between the two stocks?

Problem (d) What is the covariance between each stock and the market index?

Reference no: EM132959985

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