The Index Model Has Been Estimated for Stocks a and B

question 21

Multiple Choice

The index model has been estimated for stocks A and B with the following results: R_A = 0.03 + 0.7R_M + e_A.
R_B = 0.01 + 0.9R_M + e_B.
$\sigma$ _M = 0.35; $\sigma$ (e_A) = 0.20; $\sigma$ (e_B) = 0.10.
The covariance between the returns on stocks A and B is

• A)0.0384.
• B)0.0406.
• C)0.1920.
• D)0.0772.

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