A has portfolio having following features: Security β Random Error σe i Weight L 1.60 7 0.25 M 1.15 11 0.30 N 1.40 3 0.25 K 1.00 9 0.20 If the risk…

The variance of Security's Return σ² = β² σ² m + σ² e The variance of the portfolio is 626.50. Let X be standard deviation of the index is X. Accordingly, variance of various securities σ² Weight(w) σ²Xw L (1.60)² (X)² + 7² = 2.56X² + 49 0.25 0.64 X² + 12.25 M (1.15)² (X)² + 11² = 1.32 X² + 121 0.30 0.40 X² + 36.30 N (1.40)² (X)² + 3² = 1.96 X² + 9 0.25 0.49 X² + 2.25 K (1.00)² (X)² + 9² = 1.00 X² + 81 0.20 0.20 X² + 16.20 Variance 1.73 X² + 67 Thus, 1.73 X² + 67 = 626.50 1.73 X² = 559.50 X² = 323.41 X = √323.41 = 17.98 Thus, standard deviation (σ m ) of the market index shall be approx. 17.98.