Rit = a₁ + B₁RMt + et, t = 1,..., T,i = 1, ..., N RMt~ lid N (0,0%) Eit~ iid N(0,02) cov (€is, Ejt) = 0 for all i #j, t and s RMt is independent of Eit for all i and t where Rit denotes the return on asset i and RMt denotes the return on the market portfolio proxy. Let μ and μm denote the expected returns on the asset and the market, respectively, and let o and o denote the variances of the asset and the market, respectively. Finally, let om denote the covariance between the asset and the market.
Rit = a₁ + B₁RMt + et, t = 1,..., T,i = 1, ..., N RMt~ lid N (0,0%) Eit~ iid N(0,02) cov (€is, Ejt) = 0 for all i #j, t and s RMt is independent of Eit for all i and t where Rit denotes the return on asset i and RMt denotes the return on the market portfolio proxy. Let μ and μm denote the expected returns on the asset and the market, respectively, and let o and o denote the variances of the asset and the market, respectively. Finally, let om denote the covariance between the asset and the market.
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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H1.
Transcribed Image Text:Consider the single index model regression
Rit = a₁ + BiRMt + Eit, t = 1, ..., T,i = 1, ..., N
RMt~ iid N(0, 0)
Eit ~ iid N (0,0²)
cov (€ is, €jt) = 0 for all i #j, t and s
RMt is independent of Eit for all i and t
where Rit denotes the return on asset i and RMt denotes the return on the market portfolio proxy.
Let μ₁ and μm denote the expected returns on the asset and the market, respectively, and let o
and om denote the variances of the asset and the market, respectively. Finally, let om denote the
covariance between the asset and the market.
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