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:

Sales Price

The amount of money for which a product or service is sold to a customer.

Budgeted Cash Disbursements

An estimate of all cash payments that a business plans to make over a specific period, including expenses, purchases, and investments.

Merchandise Purchases

The buying of goods for resale, specifically those goods bought by a retailer to be sold to customers.

Operating Expenses

Ongoing costs for running a product, business, or system that do not include cost of goods sold but can include items like salaries and utilities.