In: Finance
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 6%, and the market’s average return was 15%. Performance is measured using an index model regression on excess returns.
Stock A | Stock B | ||||||||||
Index model regression estimates | 1% + 1.2(rM − rf) | 2% + 0.8(rM − rf) | |||||||||
R-square | 0.594 | 0.445 | |||||||||
Residual standard deviation, σ(e) | 10.6% | 19.4% | |||||||||
Standard deviation of excess returns | 21.9% | 25.5% | |||||||||
a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)
b. Which stock is the best choice under the following circumstances?