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?

  • CreatedJune 21, 2015
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