Consider the Regression Equation: R_i R_f = G₀ + G₁b_i

question 24

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:

Asset Turnover Ratio

A financial metric that measures the efficiency of a company's use of its assets to generate sales revenue, calculated by dividing sales revenue by the average total assets.

Operating Lease

Operating lease is a contract that allows for the use of an asset but does not convey rights of ownership of the asset.

Capital Lease

A leasing arrangement in which the lessee records the leased asset as if it was a purchase, reflecting it on their balance sheet as an asset and a corresponding liability.

Lease Inception

The point in time at which a lease agreement is initiated or executed between the lessor and the lessee.