Beta is often estimated by linear regression. A model often used is called the market model,...

 

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Beta is often estimated by linear regression. A model often used is called the market model, which is: Ri- Rft = ai + Bi(Rmi – Rfi) + ei In this regression, R, is the return on the stock and Rft is the risk-free rate for the same period. RM, is the return on a stock market index such as the S&P 500 index. a is the regression intercept, and (3, is the slope (and the stock's estimated beta). s represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept, a, is often called Jensen's alpha. What does it measure? If an asset has a positive Jensen's alpha, where would it plot with respect to the SML? What is the financial interpretation of the residuals in the regression? Beta is often estimated by linear regression. A model often used is called the market model, which is: Ri- Rft = ai + Bi(Rmi – Rfi) + ei In this regression, R, is the return on the stock and Rft is the risk-free rate for the same period. RM, is the return on a stock market index such as the S&P 500 index. a is the regression intercept, and (3, is the slope (and the stock's estimated beta). s represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept, a, is often called Jensen's alpha. What does it measure? If an asset has a positive Jensen's alpha, where would it plot with respect to the SML? What is the financial interpretation of the residuals in the regression?

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Jensens Alpha is the excess return which is not explained b... View the full answer