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.

---

Definitions:

Assets

Assets held or managed by a company anticipated to yield future financial gains.

Partnership

A business structure where two or more individuals share ownership, profits, liabilities, and decision-making processes.

Ownership

Ownership denotes the legal rights to possess, use, control, benefit from, and dispose of an asset or property.

Partnership

An officially permitted business engagement where various individuals participate in oversight and income sharing.