The Index Model Has Been Estimated for Stocks a and B

question 16

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.
Σ_M = 0.35; σ(e_A) = 0.20; σ(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.
• E) 0.4000.