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Consider the two (excess return) index-model regression results for stocks A and B . The risk-free rate over the period was 5%, and the markets
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 5%, 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 | 0.599 | 0.448 | |||||||||
Residual standard deviation, (e) | 10.7% | 19.5% | |||||||||
Standard deviation of excess returns | 22% | 25.7% | |||||||||
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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