Tests of the CAPM That Use Regression Techniques Are Subject

question 54

Multiple Choice

Tests of the CAPM that use regression techniques are subject to inaccuracies because

• A) the statistical results used are almost always incorrect.
• B) the slope coefficient of the regression equation is biased downward.
• C) the slope coefficient of the regression equation is biased upward.
• D) the intercept of the regression equation is biased downward.
• E) the intercept of the regression equation is equal to the risk-free rate.

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Definitions:

Expected Return

The mean of all potential investment returns, adjusted for the probability of each result occurring.

Security's Beta

A measure of an investment's volatility compared to the market as a whole, indicating its risk in relation to the market.

Risk Premium

The extra return expected from an investment for taking on additional risk.

Security Market Line

A graphical representation of the expected return of an asset compared to its risk, as measured by beta.