The historical rate of return on stock A was regressed on the rate of return of stock M (the explanatory variable). The slope of the regression line was 0.8, the standard deviation of the residuals was 0.3 and the standard deviation of the rate of return of M was 0.2. What was the standard deviation of the rate of return on A

0.3400

Explanation:

Total variance of security = (Standard deviation of security)^2 =  (Beta)^2*(Standard deviation of security)^2 + (Standard deviation of error terms)^2

Total variance of security = (Standard deviation of security)^2 = (0.8)^2*(0.2)^2 + (0.3)^2

Total variance of security = (Standard deviation of security)^2 = 0.1156

Standard deviation of the rate of return on A = √0.1156

Standard deviation of the rate of return on A = 0.3400

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