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Suppose the standard deviation of the market index portfolio is 25%. Given the following information: Stock Beta Mean Excess Return Standard Deviation A 1.0 10%

Suppose the standard deviation of the market index portfolio is 25%. Given the following information:

Stock

Beta

Mean Excess Return

Standard Deviation

A

1.0

10%

40%

B

0.2

2%

30%

Break down the variance of stock A and B into its systematic and firm-specific components.

Which one has greater systematic risk?

Which one has greater firm specific risk?

Which one has higher r-square?

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