The Index Model Has Been Estimated for Stocks a and B

question 71

Multiple Choice

The index model has been estimated for stocks A and B with the following results: R_A = 0.01 + 0.8R_M + e_A.
R_B = 0.02 + 1.1R_M + e_B.
Σ_M = 0.30; 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) 0.0050.
• E) 0.0792.

---

Definitions:

Correlation Coefficient

A statistical measure that indicates the extent to which two variables fluctuate together, denoting strength and direction of a linear relationship.

Correlational Research

A type of research method that involves measuring and assessing the statistical relationship between two variables.

Correlation Coefficients

Statistical measures that indicate the extent to which two variables fluctuate together, ranging from -1 to 1, where 0 means no correlation.

Experimental Control

A method used in scientific studies to minimize the influence of variables other than the one being studied, ensuring the results are due to the variable of interest.