Assume that security returns are generated by the single-index model,
Ri = αi + βiRM + ei
where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data:
Security βi E(Ri) σ(ei)
A 1.4 14% 23%
B 1.6 16 14
C 1.8 18 17
a. If σM = 22%, calculate the variance of returns of securities A, B, and C. (Do not round intermediate calculations. Round your answers to the nearest whole number.)
