You run a regression of monthly returns of Mapco, an oil and gas-producing firm, on the S&P 500 Index and come up with the following output for the period 19911995: R_Mapco=0.0006+1.2xR_M and R² = 5%. The Treasury bond rate is 2% and equity risk premium is 5.5%.

a. Compute Jensens alpha. What does this value tell you about the managers abilities at Mapco?

b. What does R² measure? What proportion of this firms risk is diversifiable?

c. What would an investor in Mapco's stock require as a rate of return? Construct the 95% confidence interval for the required rate of return for Mapco if the historical standard deviation of Mapcos rate of return is 10% and rate of returns are normally distributed.