Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA 5.0% +1.30RM + ед RB -2.0% +1.60RM + еB OM - 20%; R-squarе д 0.20; R-squareB = 0.12 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 0 0 1

Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA 5.0% +1.30RM + ед RB -2.0% +1.60RM + еB OM - 20%; R-squarе д 0.20; R-squareB = 0.12 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 0 0 1

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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Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA= 4.0%+ 0.50RM + eA RB = -1.2% + 0.70RM + eB OM 17%; R-squareA = 0.26; R-squareg = 0.18 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-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
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA= 3.6 % + 1.20RM + eA RB = -1.6 % +1.50RM + eg OM = 16%; R-squareA = 0.25; R-squareg = 0.15 Break down the variance of each stock to the systematic and firm-specific components. (Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. Round your answers to 4 decimal places.) Risk for A Risk for B Systematic Firm-specific
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA 3.2% + 1.10RM + EA RB = -1.4% + 1.25RM + eB OM = 30%; R-squarea = 0.28; R-squareB = 0.12 Break down the variance of each stock to the systematic and firm-specific components. (Do not round intermediate calculations. Calculate using numbers in decimal form, not percentages. Round your answers to 4 decimal places.) Risk for A Risk for B Systematic Firm-specific
Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively. Answer the following questions. (a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?
Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively.(a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?
Suppose the index model for stocks A and B is estimated with the following results: rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB, σM = 20%, and RM = rM − rf . The regression R2 of stocks A and B is 0.40 and 0.30, respectively. Answer the following questions. Total: (a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA= 4.0% + 0.50RM + eA RB= -1.2% + 0.7RM + eB sigmaM= 17% ; R-squareA = 0.26 ; R-squareB= 0.18 Break down the variance of each stock to the systematic and firm-specific components (write in decimal form, rounded to 4 decimal places). Risk for A Risk for B Systematic Firm-specific
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3% + .7RM + eARB = −2% + 1.2RM + eBσM = 20%; R-squareA = .20; R-squareB = .12Break down the variance of each stock into its systematic and firm-specific components.
(c) Consider information given in the table below and answers the question asked thereafter: i. Calculate expected return on each stock? On the basis of this measure, which stock you will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of this measure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of this measure, which stock you will choose?iv. Calculate covariance and coefficient of correlation between the returns of the stocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfolio comprising of $35,000 invested in stock A and remaining amount in stock B. Calculate risk and return of your portfolio. (d) Firm A reports a Profit Margin of 6.5% and a Total Asset Turnover Ratio of 3.25. Their total asset level is $8,500,000. Assume there are 700,000 shares outstanding and the PE ratio is 11. Also, assume the Return on Equity is 16%. Based on this, calculate…
Consider the two (excess return) index model regression results for A and B. RA= 0.9% + 1.1RM , R-square = 0.590, and Residual Standard Deviation = 11% RB= -1.4% + 0.6RM, R-square = 0.456, and Residual Standard Deviation = 9.2% Which stock has more firm-specific risk, market risk, and greater fraction of return variability for market movement? Also, if rf were constant at 4.4% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A (write as percentage, rounded to 2 decimal places)?
When we test CAPM using historical data, a classic test is to regress excess returns of stocks onto the stock betas, using the following regression specification across stocks: - Rp Rf =α+By+ε where Rup - Rf is the average excess return of a security or portfolio, ẞ is the estimated beta of the security or portfolio, & is the regression residual, and a (Alpha) and y (Gamma) are regression coefficients. Based on the regression, which of the following statements are true if CAPM is true? Select all two correct statements. The Alpha is zero The Alpha is positive The Gamma is positive The Gamma is zero

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