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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 4%, and the market's average
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 4%, and the market's average return was 11%. Performance is measured using an index model regression on excess returns as follows. Stock A Stock B Index model regression estimates 1% + 1.2(M-17) 2% +0.8("M-77) R-square 0.683 0.49 Residual standard deviation, (e) 12.1% 20.9% Standard deviation of excess returns 23.4% 28.5% Which stock is the best choice under each of the three following circumstances? (Instruction: Please fill in the blank with capital letter A or B for each circumstance.) 1. This is the only risky asset to be held by the investor. Your answer: Stock 2. This stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market-index fund. Your answer: Stock 3. This is one of many stocks that the investor is analyzing to form an activity managed stock portfolio. Your answer: Stock
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