Question
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 8%, and the markets average
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 8%, and the markets average return was 12%. Performance is measured using an index model regression on excess returns. Stock A Stock B Index model regression estimates 1% + 1.2(rM rf) 2% + 0.8(rM rf) R-square 0.653 0.475 Residual standard deviation, (e) 11.6% 20.4% Standard deviation of excess returns 22.9% 27.5% a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) b. Which stock is the best choice under the following circumstances?
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