Consider the Regression Equation:r_i- R_f= G₀+ G₁b_i+ G₂s²(e_i)+ E_it Where:r_i-

question 17

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
Bi= 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,g₂to 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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