Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter2: Risk And Return: Part I
Section: Chapter Questions
Problem 12P: Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average...
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Question
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.
(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?
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