Consider the following linear regression model: (R₁-r) = a + b(RMkt - rf) + e; The b, in the regression: measures the deviation from the best fitting line and is zero on aver
Consider the following linear regression model: (R₁-r) = a + b(RMkt - rf) + e; The b, in the regression: measures the deviation from the best fitting line and is zero on aver
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider the following linear regression model:
(R₁-r)= a; + b(RMkt - rf) + e;
The b; in the regression:
O
measures the deviation from the best fitting line and is zero on aver-
measures the sensitivity of the security to market risk.
measures the diversifiable risk in returns.
Expert Solution
Step 1: Brief description
In the this linear regression model (Ri-rf) = 
+ bi(RMkt -rf) + ei, Ri is the expected return of security i, is the intercept of the regression line of security i, rf is the risk free return, RMkt is the expected return from the market index and ei is the residual or the error term.
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