Question
You have regressed the excess returns for two stocks on the corresponding excess returns for the market with the following results: RA = 0.01 +
You have regressed the excess returns for two stocks on the corresponding excess returns for the market with the following results:
RA = 0.01 + 1.2(RM); R2 = 0.576; residual standard deviation = 0.103 RB = 0.02 + 0.8(RM); R2 = 0.436; residual standard deviation = 0.0.091
a. Which stock has more firm-specific risk?
b. Which firm has more market risk?
c. The market explains a greater percentage of the volatility of returns for which stock?
d. Assume the risk free rate is constant at 6%. Determine the regression intercept for stock A, if you had used total returns instead of excess returns.
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