When the annualied monthly percentage rates of return for a stock market index were regressed against the returns for ABC and XYZ stocks over a 5-year period ending in 2013, using an ordinary least squares regression, the following results were obtained:

Explain what these regression results tell the analyst about risk- return relationships for each stock over the sample period. Comment on their implications for future risk-return relationships, assuming both stocks were included in a diversified common stock portfolio, especially in view of the following additional data obtained from two brokerage houses, which are based on 2 years of weekly data ending in December 2013.

Transcribed Image Text:

Statistic Alpha Beta R² Residual standard deviation ABC -3.20% 0.60 0.35 13.02% XYZ 7.3% 0.97 0.17 21.45%