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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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