Consider the Regression Equation

question 32

Multiple Choice

Consider the regression equation:
R_i- r_f = g₀ +g₁b₁ + g₂s²(e_i) + e_it
Where:
R_i - r_f = 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 g₀ 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 these.

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Definitions:

Marginal Cost

The expense incurred from the production of an extra single unit of a product or service.

Total Cost

The complete cost of production that involves both fixed and variable costs to produce a given level of output.

Cherry Orchard

A cultivated area where cherry trees are grown for fruit production.

Marginal Cost

The cost of producing an additional unit of a good or service.