Consider the two (excess return) index model regression results for stock A and B RA = 0.01 + 1.2RM R2 of 0.576; Std deviation of error term of 10.3% RB = -0.02 + 0.8RM R2 of 0.436; Std deviation of error term of 9.1%

a) Which stock has more firm-specific risk? Explain [4 points]

b) Which has greater market risk? Explain [4 points]

c) For which stock does market movement explain a grater fraction of return variability? Explain [4 points]

d) Which stock had an average return in excess of that predicted by the CAPM. Explain [3 points]