Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 4%, and the markets average return was 11%. Performance is measured using an index model regression on excess returns as follows.

Which stock is the best choice under each of the three following circumstances? (Instruction: Please fill in the blank with capital letter A or B for each circumstance.)

1. This is the only risky asset to be held by the investor. Your answer: Stock

2. This stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market-index fund. Your answer: Stock

3. This is one of many stocks that the investor is analyzing to form an activity managed stock portfolio. Your answer: Stock

Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns Stock A 1% + 1.2(rmrp) 0.683 12.1% 23.4% Stock B 2% +0.81M-) 0.49 20.9% 28.5% Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns Stock A 1% + 1.2(rmrp) 0.683 12.1% 23.4% Stock B 2% +0.81M-) 0.49 20.9% 28.5%