# nhw5a - Homework 5 1. Using the single factor model for...

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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 R-squared. Explain what R-square 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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## nhw5a - Homework 5 1. Using the single factor model for...

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