Mongi Moskowitz is a financial analyst analyzing a Pharmaceutical stock J&Y Inc. He used the monthly returns of J&Y Inc. in a single index model as follows: rJ&Y = -0.003 + 0.85rM + zJ&Y where z is the error term. The variance of J&Y equals 0.0770. Also, the monthly risk-free rate is 0.003 and the coefficient of determination is 0.94.

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

2. Calculate the variance and standard deviation of the market. Interpret your answer. (3 marks) 3. Calculate the residual standard deviation of J&Y. Interpret your answer. (3 marks) 4. Calculate and interpret the abnormal return of J&Y and discuss the detail of the investment implications/strategy. (4 marks) 5. Consider stock W which has a correlation of 40% with J&Y, has a beta equals to 1.3, and an expected return 16%. Find the residual variance of stock W. (4 marks)