Use the equation for the question(s)below. Consider the following linear regression model: (R i - r f )= a i + b i (R Mkt - r f )+ e i -The e_i in the regression: A)measures the market risk in returns. B)measures the deviation from the best fitting line and is zero on average. C)measures the sensitivity of the security to market risk. D)measures the historical performance of the security relative to the expected return predicted by the SML.

Question

Quizplus · Accepted Answer

The e_i in the regression measures the deviation from the best fitting line and is expected to have a mean of zero. It represents the random error in the regression model, and its value indicates how much the actual data points differ from the predicted values based on the regression equation. It is not related to market risk or the historical performance of the security.

Use the Equation for the Question(s)below