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:

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The way in which a nation’s total earnings are divided among its population.

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