Consider the Regression Equation

Consider the regression equation:
R_i- r_f = g₀ +g₁b₁ + g₂s²(e_i) + e_it
Where:
R_i - r_f = the average difference between the monthly return on stock i and the monthly risk-free rate
B_i= the beta of stock i
S²(e_i) = 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 g₀ to 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 these.

Correct Answer:

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