Consider the two (excess return) index model regression results for stocks A and B RA 01 1 2RM R squared 576 ( e) 10 3 RB 02 8RM R squared 436 (e) 9 1 a Which stock has more firm specific risk b Which has greater market risk c For which stock does market movement explain a greater fraction of retur...

a Firmspecific risk is measured by the residual standard deviation Thus stoc ...

Consider the two (excess return) index model regression results for stocks A and B: RA = .01

Question:

Consider the two (excess return) index model regression results for stocks A and B:

RA = .01 + 1.2RM

R- squared = .576

σ ( e) = 10.3%

RB = - .02 + .8RM

R- squared = .436

σ(e) = 9.1%

a. Which stock has more firm- specific risk?

b. Which has greater market risk?

c. For which stock does market movement explain a greater fraction of return variability?

d. Which stock had an average return in excess of that predicted by the CAPM?

e. If rf were constant at 6 percent and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A?

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...