On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components Var(P) = b² × Var(S) + Var(e). The first term in the right-hand side of the equation, b² × Var(S) represents.

Question

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The first term in the right-hand side of the equation represents the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. This is because it includes the variance of the exchange rate (Var(S)) multiplied by a coefficient (b²) that measures the sensitivity of the asset's value to changes in the exchange rate. The second term, Var(e), captures the residual part of the dollar value variability that is independent of exchange rate movements.

On the Basis of Regression Equation We Can Decompose