Consider the regression equation: r_i − r_f = g₀ + g₁b_i + e_it Where: R_i − r_f = the average difference between the monthly return on stock i and the monthly risk-free rate B_i = the beta of stock i This regression equation is used to estimate A) the benchmark error. B) the security market line. C) the capital market line. D) the benchmark error and the security market line. E) the benchmark error, the security market line, and the capital market line.

Question

Quizplus · Accepted Answer

The regression equation provided is a form of the Capital Asset Pricing Model (CAPM), which is used to estimate the expected return on a security based on its beta and the expected market return. This is directly related to the concept of the security market line (SML), which plots the expected return of a security or portfolio against its beta. The equation does not directly estimate the capital market line (CML) or benchmark error. The CML represents the risk-return trade-off for efficient portfolios, and benchmark error is a concept related to the deviation of a portfolio's returns from a benchmark's returns, which is not what this equation is estimating.

Consider the Regression Equation: Ri − Rf = G0

Consider the Regression Equation: R_i − R_f = G₀