When the annualized monthly percentage rates of return for a stock market index were regressed against the

Question:

When the annualized monthly percentage rates of return for a stock market index were regressed against the returns for ABC and XYZ stocks over a 5-year period ending in 2013, using an ordinary least squares regression, the following results were obtained:

Statistic .......................ABC ..................XYZ

Alpha .......................-3.20% ..................7.3%

Beta .............................0.60................... 0.97

R2 ...............................0.35................... 0.17

Residual standard deviation.13.02% ...........21.45%

Explain what these regression results tell the analyst about risk-return relationships for each stock over the sample period. Comment on their implications for future risk-return relationships, assuming both stocks were included in a diversified common stock portfolio, especially in view of the following additional data obtained from two brokerage houses, which are based on 2 years of weekly data ending in December 2013.

Brokerage House.................... Beta of ABC........... Beta of XYZ

A ................................................... .62 ......................1.45

B ................................................... .71...................... 1.25

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