You are a portfolio manager, and your work is to analyse two stocks, Moo and Neh. You estimated the returns using the single index model and got the following results :
The standard deviations for the market index, Moo and Neh are 25% , 30%, and 45%, respec tively.
- What is the firm-specific risk for Moo and Neh, respectively?
- What are the covariance and correlation coefficient between the two stocks?
- What is the standard deviation of your portfolio if you invest 40% in Moo and 40% in Neh, and 20% in T-bill?
I get 1 to be 22,36% sd for moo and 24,87% for Neh
2 Cov=0,075 and corrP=0,55556
3. Should we take =(0,5^20,3^2)+(0,5^20,45^2)+20,50,50,30,45*0,556"=0,116 for SD portfolio? I mean, what about the t-bills then that we put in 20% as a weight? But, t-bills doesn’t account for SD so not sure if I should use weight as 50% for both stocks or 40% for both stocks?
Question from old cfa question bank 2008.