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The index model has been estimated from the excess returns for stock A with the following results: RA = 12.00% + 1.20RM + eA σM = 24.00% σ(eA) = 15.00% What is the standard deviation of the return for stock A?

The index model has been estimated from the excess returns for stock A with the following results: RA= 12.00% +1.20RM+ EA OM=

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Answer #1

Given

RA = 12% + 1.20 RM + eA

SDM = 24%

SD(eA) = 15%

So, BetaA = 1.2

SDA = (Beta2A * SD2M + SD2(eA))1/2 = (1.22*242 + 152)1/2 = 32.47%

Standard deviation of the return for stock A = 32.47%

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