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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Definitions:

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, with a higher elasticity indicating a greater responsiveness.

Monopolist's Profits

The excess earnings a monopoly achieves due to the lack of competition, allowing for price control and higher profit margins.

Separate Markets

Distinct market segments or areas where transactions occur independently, often with differences in prices or products.

Resold

The act of selling a product or asset that has previously been purchased.