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    Firm-specific risk & systematic (market) risk

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    Two regression lines are presented (attached) for stocks A & B.

    a) Which stock has higher firm-specific risk? Explain.
    b) Which stock has greater systematic (market) risk? Explain.

    See the attached file.

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    Solution Preview

    See the attached file.
    a) Stock A has a higher firm-specific risk.
    The goodness of fit of regression line is better for Stock B than for Stock A.
    The better the fit the more is the ...

    Solution Summary

    Using regression of excess return on stock on market premium, the stock with higher firm-specific risk and greater systematic (market) risk are identified.