The index model for stock A has been estimated with the following result:
R_A= 0.01 + 0.94R_M+ e_A
If β_M= 0.30 and R²_A= 0.28,the standard deviation of return of stock A is _________.

Question

Quizplus · Accepted Answer

The formula for calculating the standard deviation of a security's returns using the index model is:

σA = βAσM

Where σA is the standard deviation of security A's returns, βA is security A's beta coefficient, and σM is the standard deviation of the market's returns.

Plugging in the given values, we get:

σA = 0.30 x 0.28 = 0.084

Therefore, the standard deviation of return of stock A is √(0.084) = 0.5329, which corresponds to answer choice D.

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