For the market model, each security's error term is assumed to
A) have the same standard deviation.
B) have an expected value of 100%.
C) be in a flat distribution.
D) have an expected value of 0.

Question

Quizplus · Accepted Answer

The market model assumes that each security's error term has an expected value of 0. This means that over time, the security's actual return will average out to be the same as the expected return predicted by the model. The other choices (A, B, and C) are not assumptions of the market model.

For the Market Model, Each Security's Error Term Is Assumed