Consider the Regression Equation: R_i − R_f = G₀

question 19

Multiple Choice

Consider the regression equation: r_i − r_f = g₀ + g₁b_i + g₂s²(e_i) + e_it
Where:
R_i − r_t = the average difference between the monthly return on stock i and the monthly risk-free rate
B_i = the beta of stock i
S²(e_i) = a measure of the nonsystematic variance of the stock i
If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₂, to be

• A) 0.
• B) 1.
• C) equal to the risk-free rate of return.
• D) equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate.
• E) None of the options are correct.

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Definitions:

Peak-Load Pricing

Peak-load pricing is a strategy that involves charging higher prices during periods of high demand and lower prices during periods of low demand to manage usage and balance supply and demand.

Consumer Willingness

The maximum amount a consumer is ready to pay for a good or service, reflecting their valuation of it.

Marginal Revenue

The added revenue obtained from trading an additional unit of a product or service.

Decreasing Cost Industry

An industry where an increase in production leads to a decrease in the average cost of producing each unit, often due to economies of scale.