The Error Term ε in a Regression Model Represents

question 50

Multiple Choice

The error term ε in a regression model represents

• A) a random error in the data.
• B) unsystematic variation in the dependent variable.
• C) variation not explained by the independent variables.
• D) all of these.

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Definitions:

Diversifiable Risk

A type of risk that can be reduced or eliminated from a portfolio through investments in a variety of assets, also known as unsystematic risk.

Arbitrage Pricing Model

A theory for asset pricing that takes into account multiple risk factors and the return of an asset, assuming no arbitrage opportunities.

Characteristic Line

In finance, this is a line generated in a statistical plot to describe how the returns of a security relate to the returns of the overall market, used in the Capital Asset Pricing Model (CAPM).

Market Risk

The risk of losses in investments due to factors that affect the entire market, such as economic recessions or political instability.