8. C. d. a. Firm-specific risk is measured by the residual standard deviation. Thus, stock A has more firm-specific risk: 10.3% > 9.1% Market risk is measured by beta, the slope coefficient of the regression. A has a larger beta coefficient: 1.2 > 0.8 R² measures the fraction of total variance of return explained by the market return. A's R2 is larger than B's: 0.576 > 0.436 Rewriting the SCL equation in terms of total return () rather than excess return (R): -=a+ẞx(-7)= a+r, x(1-3)+Bxr The intercept is now equal to: a+r, x(1 − ) = 1% +7 × (1−1.2) Since rr 6%, the intercept would be: 1% +6%(1-1.2) 1%-1.2% = -0.2%
8. C. d. a. Firm-specific risk is measured by the residual standard deviation. Thus, stock A has more firm-specific risk: 10.3% > 9.1% Market risk is measured by beta, the slope coefficient of the regression. A has a larger beta coefficient: 1.2 > 0.8 R² measures the fraction of total variance of return explained by the market return. A's R2 is larger than B's: 0.576 > 0.436 Rewriting the SCL equation in terms of total return () rather than excess return (R): -=a+ẞx(-7)= a+r, x(1-3)+Bxr The intercept is now equal to: a+r, x(1 − ) = 1% +7 × (1−1.2) Since rr 6%, the intercept would be: 1% +6%(1-1.2) 1%-1.2% = -0.2%
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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Transcribed Image Text:8.
C.
d.
a. Firm-specific risk is measured by the residual standard deviation. Thus,
stock A has more firm-specific risk: 10.3% > 9.1%
Market risk is measured by beta, the slope coefficient of the regression. A has
a larger beta coefficient: 1.2 > 0.8
R² measures the fraction of total variance of return explained by the market
return. A's R2 is larger than B's: 0.576 > 0.436
Rewriting the SCL equation in terms of total return () rather than excess
return (R):
-=a+ẞx(-7)=
a+r, x(1-3)+Bxr
The intercept is now equal to:
a+r, x(1 − ) = 1% +7 × (1−1.2)
Since rr 6%, the intercept would be: 1% +6%(1-1.2) 1%-1.2% = -0.2%
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