The index model for stock A has been estimated with the following result: R_A = 0.01 + 0.94R_M + e_A
If $\sigma$ _M = 0.30 andR²_A = 0.28, the standard deviation of return of stock A is

Question

The index model for stock A has been estimated with the following result: R_A = 0.01 + 0.94R_M + e_A
If

\sigma

_M = 0.30 andR²_A = 0.28, the standard deviation of return of stock A is

Quizplus · Accepted Answer

The standard deviation of stock A can be calculated using the formula: σA = sqrt(βA^2 * σM^2 + σeA^2). Given R²A = 0.28, we can find σeA using the formula: σeA = sqrt((1 - R²A) * σA^2). Solving these equations gives σA ≈ 0.5329.

The Index Model for Stock a Has Been Estimated with the Following