Question: Consider the two excess return (when the risk-free rate is subtracted from a return) single-index model regression results for stocks A and B. Which stock

Consider the two excess return (when the risk-free rate is subtracted

Consider the two excess return (when the risk-free rate is subtracted from a return) single-index model regression results for stocks A and B. Which stock has more firm-specific risk?

Which stock has more market risk?

For which stock does market movement explain a greater fraction of return variability?

If the risk free rate were constant at 6% and the regression had been run using total returns(on stocks A and B and the market portfolio) rather than excess returns, what would have been the regression intercept for stock A?

RA Rf = 1% + 1.2(RM Rp) R2 = .576 Residual standard deviation = 10.3% RB RF = -2% +.8(RM RF) R2 = .436 Residual standard deviation = 9.1%

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