Consider the Regression Equation

question 8

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(_ei) = 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 g₀has 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 the above.

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