Use the Equation for the Question(s)below

question 47

Multiple Choice

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

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

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Definitions:

Zero-Coupon Bonds

Bonds that do not pay periodic interest payments. Instead, they are issued at a discount to their face value, and their profit comes from the difference between the purchase price and the face value paid at maturity.

Yield to Maturity

The total return anticipated on a bond if it is held until it matures, encompassing both interest payments and the appreciation or depreciation of the original investment.

Face Value

The face value or amount in dollars indicated on a financial security, such as a bond or note, which is the total that will be paid out when it matures.

Yield to Maturity

The expected overall yield of a bond, assuming it is retained until its maturity date, comprising of both interest earnings and profits from capital appreciation.