the two (excess return) index model regression results for A and B: RA 1% 1.2RM R-SQR .576 RESID STD DEV-N 10.3% RB 2% .8RM R-SQR .436 RESID STD DEV-N 9.1% a. Which stock has more firm-specific risk? b. Which has greater market risk? c. For which stock does market movement explain a greater fraction of return vari- ability? d. Which stock had an average return in excess of that predicted by the CAPM? e. If rf were constant at 6% and the regression had been run using total rather than ex- cess returns, what would have been the regression intercept for stock A?   Use the following data for problems 5 through 11. Suppose that the index model for stocks A and B is estimated from excess returns with the following results:   RA 3% .7RM eA RB 2% 1.2RM eB M 20%; R-SQRA .20; R-SQRB .12 5. What is the standard deviation of each stock? 6. Break down the variance of each stock to the systematic and firm-specific components. 7. What are the covariance and correlation coefficient between the two stocks? 8. What is the covariance between each stock and the market index? 9. Are the intercepts of the two regressions consistent with the CAPM? Interpret their values. III. Equilibrium In Capital Markets 10. Single−Index and Multifactor Models The McGraw−Hill Companies, 2001           316 PART III Equilibrium in Capital Markets     10. For portfolio P with investment proportions of .60 in A and .40 in B, rework problems 5, 6, and 8. 11. Rework problem 10 for portfolio Q with investment proportions of .50 in P, .30 in the market index, and .20 in T-bills. 12. In a two-stock capital market, the capitalization of stock A is twice that of B. The stan- dard deviation of the excess return on A is 30% and on B is 50%. The correlation coef- ficient between the excess returns is .7. a. What is the standard deviation of the market index portfolio?