Assume the risk-free rate is 1% (rf = 1%), the expected return on the market portfolio is 5%

(E[rM] = 5%) and the standard deviation of the return on the market portfolio is 15% (M =

15%). Assume the CAPM holds. A stock with a beta of 1 has a return standard deviation

(volatility) of 30%.

a. What is the standard deviation (volatility) of the systematic component of the stock's

return?

b. What is the standard deviation (volatility) of the idiosyncratic component of the stock's

return?

c. What fraction of the stock's return variance is systematic?