Use the Equation for the Question(s)below

question 24

Multiple Choice

Use the equation for the question(s) below.Consider the following linear regression model:
(Ri - rf) = ai + bi(RMkt - rf) + ei
-The ei in the regression:

• A)measures the market risk in returns.
• B)measures the deviation from the best-fitting line and is zero on average.
• C)measures the sensitivity of the security to market risk.
• D)measures the historical performance of the security relative to the expected return predicted by the SML.

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Definitions:

Rainy Days

Days on which a significant amount of precipitation falls, typically defined as days when there is at least 0.1 inches of rainfall.

Expected Amount

The average value or mean that one anticipates to occur over a long series of trials in a random experiment.

Pair Of Dice

Two small cubes with faces marked from one to six, used in games to generate random numbers through tossing.

Expected Profit

The forecasted average of possible profits from an investment, considering probabilities of different outcomes.