Question: 2. Consider the index model regression results for stocks A and B: RA = 1% + 1.5RM R-square = 0.436 Firm-specific standard deviation (eA) =

2. Consider the index model regression results for stocks A and B:

RA = 1% + 1.5RM R-square = 0.436 Firm-specific standard deviation (eA) = 20%

RB = -2% + 0.8RM R-square = 0.576 Firm-specific standard deviation (eB) = 15%

A. Which stock has more firm-specific risk?

B. Which stock has smaller systematic risk?

C. Which stock is overpriced based on the single-index model?

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