Assume that the monthly returns of JOY Inc. are described by the following single index model using returns:

R_JOY= -0.004 + 1.27R_Market+ u_JOY

Where u is the error term. The variance of JOY equals to 0.0640. Also, the monthly risk-free rate is 0.005 and the systematic variance of JOY is 0.0512.

1. Calculate the coefficient of determination of the regression. Interpret your answer.

2. Calculate the idiosyncratic risk (residual standard deviation) of JOY. Interpret your answer.

3. Calculate the variance and standard deviation of the market. Interpret your answer.

4. Calculate the abnormal return (mispricing) of JOY (based on the capital asset pricing model). Would this stock plot below or above the security market line and discuss its investment implications?