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.

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