2. Beta is often estimated by linear regression. A model commonly used is called the market model, which is: Rt Rft = i + i[RMt Rft] + t In this regression, Rt is the return on the stock and Rft is the risk-free rate for the same period. RMt is the return on a stock market index, such as the S&P 500 index; i is the regression intercept; i is the slope (and the stocks estimated beta); and t represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept, , is often called Jensens alpha. What does it measure? If an asset has a positive Jensens alpha, where would it plot with respect to the SML? What is the financial interpretation of the residuals in the regression?

3. Compare your beta for Kellogg Company to the beta you find on finance.yahoo.com. How similar are they? Why might they be different?