Basic Econometrics 5th Edition by Damodar Gujarati,Dawn Porter

تمرين 5

What is known as the characteristic line of modern investment analysis is simply the regression line obtained from the following model:
where r it = the rate of return on the ith security in time t
r mt = the rate of return on the market portfolio in time t
u t = stochastic disturbance term
In this model i is known as the beta coefficient of the ith security, a measure of market (or systematic) risk of a security.*
*See Haim Levy and Marshall Sarnat, Portfolio and Investment Selection: Theory and Practice, Prentice Hall International, Englewood Cliffs, NJ, 1984, Chap. 12.
On the basis of 240 monthly rates of return for the period 1956-1976, Fogler and Ganapathy obtained the following characteristic line for IBM stock in relation to the market portfolio index developed at the University of Chicago:*
a. A security whose beta coefficient is greater than one is said to be a volatile or aggressive security. Was IBM a volatile security in the time period under study
b. Is the intercept coefficient significantly different from zero If it is, what is its practical meaning
*H. Russell Fogler and Sundaram Ganapathy, Financial Econometrics, Prentice Hall, Englewood Cliffs, NJ, 1982, p. 13.