CAS Exam 9 Spring 2015, Question 3
Study guide: Exam 9
Given the following information:
| Stock | Capitalization ($) | Alpha | Beta | Expected Return | Standard Deviation |
|---|---|---|---|---|---|
| A | 2500 | 1.0% | 0.9 | 7.3% | 30% |
| B | 4700 | 0.0% | 0.3 | 2.1% | 10% |
| C | 2800 | -0.5% | 1.7 | 11.4% | 40% |
- An index of stocks A, B and C is used as the market index for a single-index model.
- The standard deviation of the market index portfolio is 20%.
Part a (0.25 points)
Calculate the covariance between stock A and the index portfolio.
Part b (0.25 points)
Calculate the covariance between stock A and stock B.
Part c (0.5 points)
Calculate the systematic and firm-specific components of the variance of stock C.
Part d (0.5 points)
Assume 100 stocks are added to this financial market. Briefly describe two disadvantages of using the Markowitz model rather than the single-index model in this case.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution