Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA= 2.5% +0.95RM + eA RB 1.8% + 1.10RM + eB OM = 27%; R-squareд = 0.23; R-squarep = 0.11 Break down the variance of each stock to the systematic and firm-specific components. Note: Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%. Round your answers to nearest whole number. Systematic Firm-specific Risk for A Risk for B
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA= 2.5% +0.95RM + eA RB 1.8% + 1.10RM + eB OM = 27%; R-squareд = 0.23; R-squarep = 0.11 Break down the variance of each stock to the systematic and firm-specific components. Note: Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%. Round your answers to nearest whole number. Systematic Firm-specific Risk for A Risk for B
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Suppose that the index model for stocks A and B is estimated from excess returns with the following results:
RA = 2.5% + 0.95RM + eA
RB = -1.8% + 1.10RM + eB
OM = 27%; R-squareд = 0.23; R-squareB = 0.11
Break down the variance of each stock to the systematic and firm-specific components.
Note: Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. For example use "20"
for calculation if standard deviation is provided as 20%. Round your answers to nearest whole number.
Systematic
Firm-specific
Risk for A
Risk for B
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