# 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?

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?

## Answer to relevant Questions

Are the intercepts of the two regressions consistent with the CAPM? Interpret their values. Suppose that the index model for stocks A and B is estimated with the following results: RA = .03 + .70RM + eA RB = 2.02 + 1.20RM + ...Use the data from The Financial Post in Figure 10.8 to construct the trin ratio for the TSX. Is the trin ratio bullish or bearish? Return to Table 12.1 and calculate the real and nominal rates of return on the RRB bond in the second and third years. Table 12.1 The spot rates of interest for five Canada bonds are shown in the following table. Assume all securities pay interest annually. Spot Rates of Interest Term to Maturity (years) Spot Rate of Interest (%) 1............. ...If the expected rate of return of the market portfolio is 15 percent and a stock with a beta of 1.0 pays a dividend yield of 4 percent, what must the market believe is the expected rate of price appreciation on that stock?Post your question

0