Consider the regression equation:r_i- r_f= g₀+ g₁b_i+ g₂s²(e_i)+ e_it where:r_i- r_t= the average difference between the monthly return on stock i and the monthly risk-free rate Bi= 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,g₂to 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, then the expected value of the coefficient on the nonsystematic variance term (g₂) should be equal to zero, as nonsystematic risk should be diversifiable and therefore not rewarded with additional returns.

Consider the Regression Equation:ri- Rf= G0+ G1bi+ G2s2(ei)+ Eit Where:ri-

Consider the Regression Equation:r_i- R_f= G₀+ G₁b_i+ G₂s²(e_i)+ E_it Where:r_i-