Consider the regression equation: R_i- r_f= g₀+g₁b₁+ g₂s²(e_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 S²(_ei)= a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid,you would expect the estimated coefficient g₀has to be A)0. B)1. C)equal to the risk-free rate of return. D)equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate. E)none of the above.

Question

Quizplus · Accepted Answer

If the CAPM is valid, the intercept g₀ should be zero, as the CAPM implies that the expected excess return on a stock is solely determined by its beta.

Consider the Regression Equation