Consider the two (excess return) index model regression results for A and B:
RA =1% =1.2RM
R-SQR =.576
RESID STD DEV-N=10.3%
RB_=2% = .8RM
R-SQR =.436
RESID STD DEV-N =9.1%
a. Which stock has more firm-specific risk?
b. Which has greater market risk?
c. For which stock does market movement explain a greater fraction of return variability?
d. Which stock had an average return in excess of that predicted by the CAPM?
e. If rf were constant at 6% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? Use the following data for problems 5 through 11. Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 3% =.7RM =eA
RB = -2% = 1.2RM=eB
=M =20%; R-SQRA =.20; R-SQRB =.12