Suppose that the index model for stocks A is estimated from excess returns with the...
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Suppose that the index model for stocks A is estimated from excess returns with the following results: Rg = 3% +0.7RM +ea Where R, is the return of stock A, Rm is the return of the market, and ea is the firm specific component. Standard deviation of the market = sigma(M)= 0.2 R-squared = R2 = 0.2. This is the amount of systematic variation that can be explained among the total variation of stock returns. What is the firm-specific risk of stock A? 0 -0.2 O 0.1 O 0.0784 O 0.01
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