Consider the Regression Equation: R_i - R_f = G₀

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
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, g₂, 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 the options

Correct Answer:

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