What percentage of the variance of the stock return

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Question - A portfolio manager believes she has identified an underpriced stock. The stock is expected to yield an alpha of 0.01 and have a beta of 1.2 when FTSE100 is used as the benchmark in a single index model. Show step-by-step how the manager can create a market neutral portfolio using the underpriced stock, an exchange traded fund that tracks FTSE100, and a risk-free UK treasury security.

Given the information in part (a), if the standard deviation of FTSE100 returns is 0.20 and the standard deviation of the stock's residual returns is 0.12, what percentage of the variance of the stock's return is due to firm specific factors?

Reference no: EM133269666

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