Use the Equation for the Question(s)below

question 49

Multiple Choice

Use the equation for the question(s) below.
Consider the following regression model:
R_s - r_f = a_s + (R_F1 - r_f) + (R_F2 - r_f) + e
-The term a_s is a(n) :

• A)error term that has an expectation of zero and is uncorrelated with either factor.
• B)measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the first factor portfolio.
• C)measure of the expected percent change in the excess return of a security for a 1% change in the excess return of the second factor portfolio.
• D)constant term.

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Definitions:

Expected Value

The long-term average or mean of random variables, taking into account all possible outcomes weighted by their probabilities.

Binomial Experiment

A statistical experiment that has exactly two possible outcomes for each trial and a fixed number of trials, where the probability of success is constant.

Variance

A measure of the spread or dispersion of a set of data points around the mean, indicating how much the data values differ from the average value.

Probability Distribution

A mathematical function that provides the probabilities of occurrence of different possible outcomes for an experiment.