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Consider the two (excess return) index model regression results for stocks A and B: RA = .01 + 1.2RM R- squared = .576 σ ( e) = 10.3% RB = - .02 + .8RM R- squared = .436 σ(e) = 9.1% a. Which stock has more firm- specific risk? b. Which has greater market risk? c. For which stock does market movement explain a greater fraction of return variability? d. Which stock had an average return in excess of that predicted by the CAPM? e. If rf were constant at 6 percent and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A?
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