The index model for stock B has been estimated with the following result:
R_B = 0.01 + 1.1R_M + e_B
If σ_M = 0.20 and R²_B = 0.50,the standard deviation of the return on stock B is _________.

Question

Quizplus · Accepted Answer

The standard deviation of stock B, σ_B, can be calculated using the formula: σ_B = √(β²σ_M² + σ_e²). Given R²_B = 0.50, we know that R² = β²σ_M² / σ_B². Solving for σ_B gives σ_B = √(β²σ_M² / R²). Substituting β = 1.1, σ_M = 0.20, and R² = 0.50, we find σ_B = √((1.1)²(0.20)² / 0.50) = 0.3111.

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