Use the Equation for the Question(s)below

question 5

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 is a(n) :

• A)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.
• B)constant term.
• C)error term that has an expectation of zero and is uncorrelated with either factor.
• D)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.

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Definitions:

Adverse Selection

A situation where asymmetric information leads to the selection of undesirable alternatives in transactions, commonly seen in insurance markets.

Insurance Companies

Organizations that provide insurance policies to consumers, covering a variety of risks in exchange for premiums.

Insurance Company

A business entity that provides financial protection against losses and risks in exchange for premiums.

Property Loss

The term refers to the loss or damage of property due to various risks such as fire, theft, or natural disasters.