Consider the regression equation: r_it - r_ft = a_i + b_i(r_mt - r_ft) + e_it
Where:
R_it = return on stock i in month t
R_ft = the monthly risk-free rate of return in month t
R_mt = the return on the market portfolio proxy in month t
This regression equation is used to estimate

Question

Quizplus · Accepted Answer

The regression equation given is used to estimate the security characteristic line. It is used to measure the relationship between the returns on a particular stock and the returns on the market portfolio proxy, which is represented as r_mt - r_ft. The intercept, a_i, represents the excess return that is not explained by the market portfolio proxy, while the slope, b_i, represents the sensitivity of the stock returns to the market returns. Therefore, the correct answer is A) the security characteristic line.

Consider the Regression Equation: Rit - Rft = Ai

Consider the Regression Equation: R_it - R_ft = A_i