4.4 Read the box “The ‘Beta’ of a Stock” in Section 4.2.

a. Suppose that the value of b is greater than 1 for a particular stock.

Show that the variance of (R - Rf) for this stock is greater than the variance of (Rm - Rt).

b. Suppose that the value of b is less than 1 for a particular stock. Is it possible that variance of (R - Rf) for this stock is greater than the variance of (Rm - Rt)? (Hint: Don’t forget the regression error.)

c. In a given year, the rate of return on 3-month Treasury bills is 2.0%
and the rate of return on a large diversified portfolio of stocks (the S&P 500) is 5.3%. For each company listed in the table in the box, use the estimated value of b to estimate the stock’s expected rate of return.