Unformatted text preview: R A = 3% + 0.7R M + e A R B = -2% + 1.2R M + e B With σ M = 20% R-SQ R A = 0.2 and R-SQ R B = 0.12 a. What is the standard deviation of each stock?  b. Break down the variance of each stock to the systematic and firm specific components  c. What is the covariance between each stock and the market index?  d. Are the intercepts of the two regressions consistent with the CAPM? Interpret their values.  Question Three Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium Industrial production (I) 6% Interest rates (R) 2% Consumer confidence (C) 4% The return on a particular stock is generated according to the following equation: e C 75 . R 5 . I 1 % 15 r + + + + = Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 6%. Is the stock over- or underpriced? Explain. ...
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- Summer '09