Question: Question 3 Consider the two (excess return) index model regression results for Stock A and Stock B: Stock A Ra = 1% + 1.2 Rm

Question 3 Consider the two (excess return) index model regression results for Stock A and Stock B: Stock A Ra = 1% + 1.2 Rm R-squared = 0.576 Residual standard deviation = 10.3% Stock B Rb= -2%+0.8 Rm R-squared = 0.436 Residual standard deviation = 9.1% Explain: a) Which firm has more firm-specific risk. [5 marks] b) Which firm has greater market risk. [5 marks] c) For which stock do market movements explain a greater fraction of return volatility. [5 marks]

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