Consider the Regression Equation

question 42

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,g₁ 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) equal to the average monthly return on the market portfolio.

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Definitions:

Digestive Enzymes

Proteins secreted by the digestive system that break down food into nutrients that can be absorbed by the body.

Common Bile Duct

A tube that carries bile from the liver and gallbladder into the duodenum, the first part of the small intestine.

Gallbladder

A small organ located beneath the liver that stores and concentrates bile, aiding in the digestion of fats.

Pancreas

An organ in the body that produces insulin and enzymes important for digestion.