II. The single-index model for stock i is rrf=+ i(M-rf) + ei. The single-index model for...

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II. The single-index model for stock i is rrf=+ i(M-rf) + ei. The single-index model for stock j is rj-rf=j+ j (rM--rf)+ ej. The standard deviation of the stock market return is M=0.12. The standard deviation of e is ei=0.3. The standard deviation of ej is ej=0.15. The market beta equals 1.5 for stock i and 2 for stock j or i=1.5, B-2. The expected stock market return E(TM) is 12% and the risk-free rate rf is 5%. Suppose the simple CAPM is valid. (15 points) (a) Calculate the systematic risk, firm-specific risk, and total risk of both stocks i and j. (6 points) (b) Which stock has lower total risk and which stock has a lower expected return? (5 points) (c) Does the stock with the lower total risk have a lower expected return? Explain. (4 points) II. The single-index model for stock i is rrf=+ i(M-rf) + ei. The single-index model for stock j is rj-rf=j+ j (rM--rf)+ ej. The standard deviation of the stock market return is M=0.12. The standard deviation of e is ei=0.3. The standard deviation of ej is ej=0.15. The market beta equals 1.5 for stock i and 2 for stock j or i=1.5, B-2. The expected stock market return E(TM) is 12% and the risk-free rate rf is 5%. Suppose the simple CAPM is valid. (15 points) (a) Calculate the systematic risk, firm-specific risk, and total risk of both stocks i and j. (6 points) (b) Which stock has lower total risk and which stock has a lower expected return? (5 points) (c) Does the stock with the lower total risk have a lower expected return? Explain. (4 points)