Problem 3 (15 marks) Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: R HD .80R M +e HD…

Problem 3 (15 marks)

Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results:

RHD .02+0.80RM+eHD

R-squared .6

                RML =-0.03+1.50RM+eML

R-squared .4

σM .20

where M is S&P/TSX Comp Index, RX is the excess return of stock X. 

  • For portfolio P with investment proportion of 0.3 in HD and 0.7 in ML, calculate the systematic risk, non-systematic risk and total risk of P.

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