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  3. suppose that the index model for stocks a and b is

Suppose that the index model for stocks A and B is estimated from excess returns...

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Finance

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Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 2.5% + 0.60RM + eA RB = -1.5% + 0.7RM + eB OM = 19%; R-squareA = 0.24; R-squarep = 0.18 What is the standard deviation of each stock? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Hints: Connect uses notations where RA is stock A's return minus the risk-free rate, RM is market return minus the risk- free rate etc. To solve this problem, remember that R-squared = systematic variance/total variance. 1. calulate the stock's systematic variance. 2. calculate its total variance using the systematic variance and the R-squared formula. 3. Calculate standard deviation as square root of total variance. = Standard Deviation Stock A % Stock B %

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