In the market model, the difference between what the return actually is and what it is expected to be, given the return on the market index, is attributed to the effect of the ________ term.
A) random error
B) slope
C) intercept
D) return on the security

Question

Quizplus · Accepted Answer

The random error term represents the unpredictable and unexplainable factors that may influence the return on a security other than the market return. It is the residual term in the market model equation, which captures the variation in the actual returns that cannot be explained by the relationship with the market index return. Therefore, the difference between the actual return and the expected return (based solely on the market return) can be attributed to the random error term.

In the Market Model, the Difference Between What the Return