Consider the two (excess return) index model regression results for A and B.RA= 1.5% + 1.7RMR-square = 0.622Residual standard deviation = 12%RB= -2.4 % +1.3RMR-square=0.468Residual standard deviation = 9.8%Required:a. Which stock has more firm-specific risk?b. Which stock has greater market risk?c. For which stock does market movement explain a greater fraction of return variability?d. If rf were constant at 5.5% and the regression had been run using total rather than excess returns, what would have been theregression intercept for stock A?Complete this question by entering your answers in the tabs below.Required A Required B Required C Required DIf rf were constant at 5.5% and the regression had been run using total rather than excess returns, what would have beenthe regression intercept for stock A?Note: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.Intercept%

**Required A: Firm-specific risk**Firm-specific risk refers to the risk that is unique to an…

Answered: Consider the two (excess return) index…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 1Q

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Calculate the correlation coefficient between Blandy and the market. Use this and the previously calculated (or given) standard deviations of Blandy and the market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a well-diversified portfolio than does the average stock? Use the SML to estimate Blandy’s required return.
Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM R-square = 0.588 Residual standard deviation = 10.8% RB = –1.2% + 0.7RM R-square = 0.452 Residual standard deviation = 9% a. Which stock has more firm-specific risk? multiple choice A. Stock A B. Stock B Which stock has greater market risk? multiple choice 2 A. Stock A B. Stock B b. For which stock does market movement has a greater fraction of return variability? multiple choice 3 A. Stock A B. Stock B c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
Consider the two (excess return) index model regression results for A and B. RA= 0.9% + 1.1RM , R-square = 0.590, and Residual Standard Deviation = 11% RB= -1.4% + 0.6RM, R-square = 0.456, and Residual Standard Deviation = 9.2% Which stock has more firm-specific risk, market risk, and greater fraction of return variability for market movement? Also, if rf were constant at 4.4% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A (write as percentage, rounded to 2 decimal places)?
Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM R-square = 0.588 Residual standard deviation = 10.8% RB = –1.2% + 0.7RM R-square = 0.452 Residual standard deviation = 9% a. Which stock has more firm-specific risk? A. Stock A B. Stock B Which stock has greater market risk? A. Stock A B. Stock B b. For which stock does market movement has a greater fraction of return variability? A. Stock A B. Stock B c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM R-square = 0.588 Residual standard deviation = 10.8% RB = –1.2% + 0.7RM R-square = 0.452 Residual standard deviation = 9% a. Which stock has greater market risk? multiple choice A. Stock A B. Stock B b. For which stock does market movement has a greater fraction of return variability? multiple choice A. Stock A B. Stock B c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
d. Interpret your results in (c) above, assuming that the historical average return of 8.5% from the stock is a good benchmark. e. Critically evaluate the strengths and weaknesses of applying the implied rate of return from the RIVM as a proxy of the expected return.
Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively.(a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?
When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.
When we test CAPM using historical data, a classic test is to regress excess returns of stocks onto the stock betas, using the following regression specification across stocks: - Rp Rf =α+By+ε where Rup - Rf is the average excess return of a security or portfolio, ẞ is the estimated beta of the security or portfolio, & is the regression residual, and a (Alpha) and y (Gamma) are regression coefficients. Based on the regression, which of the following statements are true if CAPM is true? Select all two correct statements. The Alpha is zero The Alpha is positive The Gamma is positive The Gamma is zero
The slope of a regression line when the return on an individual stock's returns are regressed on the return on the market portfolio, would be: OAR BR-₁ B OC none of the answers listed here. ODO im
Consider the following regression Pt * - Pt = .07(1.4) + .4*Pt (3.6) + et where Pt * is Shiller’s ex post price of a stock, Pt is the actual price and t-ratios are in brackets. Explain in words and analytically what the dependent variable Pt * - Pt should be equal to under the efficient markets theory. Hence interpret the regression. Does it support the efficient markets theory?
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 0.03 + 0.7 RM + eA RB = -0.02+ 1.2 RM + eB σM =0.20; R-square A = 0.25 R-square B = 0.20 What is the standard deviation of A & B, respectively? Group of answer choices 0.54, 0.28 0.28, 0.54 0.45, 0.50 0.50, 0.45

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