Idiosyncratic risk of the stock, Financial Accounting

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(a)   The market considers Intel Corp (INTC) of all these stocks to be the riskiest since it has the highest beta of 1.497408. No, this measure of risk does not include the idiosyncratic risk of the stock. The idiosyncratic error will be included in the ε item in the market model of each stock.

(b)  Intel Corp (INTC) had price changes that were least closely related to the market, because it has the highest beta and hence more variation from the returns of S&P.

(c)   Apple (AAPL) has the highest expected returns. The average monthly return for this stock is 0.0234130, which is the highest of all stocks and this occurs even when the index returns are zero or flat.

(d)  With the given information and the given equation,

Expected return of HD = 0.0195538 + 1.089703*10% = 0.128524 = 12.8524%

Thus the expected return of HD is 12.8524% for the next month, with the given predictions (ignoring error term).

 


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