Question
Peterson is a financial analyst examining a health care stock Q Inc. He used monthly returns of Q Inc. in a single index model as
Peterson is a financial analyst examining a health care stock Q Inc. He used monthly returns of Q Inc. in a single index model as follows: RQ = -0.006 + 0.84RM + zQ
where z is the error term. The variance of Q equals 0.0882. Also, the monthly risk-free rate is 0.003 and the coefficient of determination is 0.92.
1. Calculate the systematic variance of Q. Interpret your answer. (4 marks)
2. Calculate the idiosyncratic risk (residual standard deviation) of Q. Interpret your answer. (3 marks)
3. Calculate the variance and standard deviation of the market. Interpret your answer. (4 marks)
4. Calculate and interpret the abnormal return of Q and discuss the detail of the investment implications/strategy. (4 marks)
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