Howard is a senior financial analyst who is examining a growth stock J&Y Inc. He used monthly returns of J&Y Inc. in a single index model as follows:

rJ&Y= 0.007 + 0.80rM+ zJ&Y

where z is the error term. The variance of J&Y equals 0.0770. Also, the monthly risk-free rate is 0.007 and the coefficient of determination is 0.78.

1. Calculate the systematic standard deviation of J&Y. Interpret your answer. (3 marks)

2. Calculate the residual standard deviation of J&Y. Interpret your answer. (3 marks)

3. Calculate the variance and standard deviation of the market. Interpret your answer. (3 marks)

4. Calculate and interpret the abnormal return ofJ&Yand discuss the detail of the investment implications/strategy? (4 marks)

5. Consider stock W which has a correlation of 40% withJ&Y, has a beta equals to 1.5, and an expected return 16%. Find the residual variance of stock W. (4 marks)