Consider the Regression Equation: R_i − R_f = G₀

question 19

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, g₂, 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 options are correct.

---

Definitions:

Oil Refineries

Industrial processing plants where crude oil is processed and refined into more useful petroleum products, such as gasoline, diesel fuel, and jet fuel.

Hurricane Katrina

One of the deadliest hurricanes to hit the United States, causing widespread destruction along the Gulf coast, particularly in New Orleans, in August 2005.

Price Floor

A government-imposed limit on how low a price can be charged for a product, aimed to ensure fair conditions for producers.

Temporary Surplus

A situation where the supply of a product exceeds demand for a short period, often leading to price reductions.