When we test CAPM using historical data, a classic test is to regress excess returns of stocks onto the stock betas, using the following regression specification across stocks: - Rp Rf =α+By+ε where Rup - Rf is the average excess return of a security or portfolio, ẞ is the estimated beta of the security or portfolio, & is the regression residual, and a (Alpha) and y (Gamma) are regression coefficients. Based on the regression, which of the following statements are true if CAPM is true? Select all two correct statements. The Alpha is zero The Alpha is positive The Gamma is positive The Gamma is zero

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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When we test CAPM using historical data, a classic test is to regress excess returns of stocks
onto the stock betas, using the following regression specification across stocks:
-
Rp Rf =α+By+ε
where Rup - Rf is the average excess return of a security or portfolio, ẞ is the estimated
beta of the security or portfolio, & is the regression residual, and a (Alpha) and y (Gamma) are
regression coefficients.
Based on the regression, which of the following statements are true if CAPM is true? Select
all two correct statements.
The Alpha is zero
The Alpha is positive
The Gamma is positive
The Gamma is zero
Transcribed Image Text:When we test CAPM using historical data, a classic test is to regress excess returns of stocks onto the stock betas, using the following regression specification across stocks: - Rp Rf =α+By+ε where Rup - Rf is the average excess return of a security or portfolio, ẞ is the estimated beta of the security or portfolio, & is the regression residual, and a (Alpha) and y (Gamma) are regression coefficients. Based on the regression, which of the following statements are true if CAPM is true? Select all two correct statements. The Alpha is zero The Alpha is positive The Gamma is positive The Gamma is zero
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