The following regression equation describes the daily returns of stock XYZ, rXYZ, in terms of an index return, rindex, and a mean zero disturbance term, where and are constants, is mean zero with a standard deviation of 1 0 , is 0 01 , and is 1 20 If the index return on a given day is 5 , what is t...

The following regression equation describes the daily returns of stock XYZ, rXYZ, in terms of an index

Question:

The following regression equation describes the daily returns of stock XYZ, rXYZ, in terms of an index return, rindex, and a mean-zero disturbance term, ε:

where α and β are constants, ε is mean zero with a standard deviation of 1.0%, ε is 0.01%, and β is 1.20. If the index return on a given day is 5%, what is the expected return of XYZ?

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