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Homework 5
1.
Using the single factor model for firm with a Beta of 1 and when the standard
deviation of the market is .275.
A.
What can we say about the standard deviation of this firm’s stock?
The firm will have a standard deviation of .275 or greater, as we are only
looking at one firm then there will be firm specific risk, total risk= .275^2 + firm
specific risk.
B.
If a new firm Gexco has a Beta of 2 and has a standard deviation of 0.6, what
is this Gexco’s firm specific risk?
If beta=2 then our market risk is 2^2*.275^2=.3025,
If the firm’s Standard deviation is .6, variance is .6^2, subtract market risk to
find firm specific risk.
.6^2.3025=.0575
C.
Use the known information to find the ratio of explained to total variance, also
known as Rsquared. Explain what Rsquare means using words such as
systematic and firm specific risk.
Explained variance =.3025,
Total variance =.6^2
(.3025)/(.6^2)= .8402777
R squared tells us the ratio of systematic risk(explained by the market) to
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 Spring '09
 Hull

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