The Index Model Has Been Estimated for Stocks a and B

question 24

Multiple Choice

The index model has been estimated for stocks A and B with the following results: R_A = 0.01 + 0.5R_M + e_A.
R_B = 0.02 + 1.3R_M + e_B.
$\sigma$ _M = 0.25; $\sigma$ (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)0.0050.

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Definitions:

IQ Scores

Numerical scores derived from standardized tests designed to measure human intelligence and cognitive abilities relative to an age group.

IQ Test

A standardized assessment tool used to measure a person's intelligence quotient, which is an indicator of their cognitive abilities relative to the population.

Age Group

A category of people of similar ages, often used for statistical, marketing, or planning purposes.

Heritability

The proportion of variation among individuals in a population that can be attributed to genetic factors.