Systematic risk can be measured statistically by using ordinary least

squares $($QLS$)$ simple linear regression analysis. A financial model

called the characteristic line is used to measure both systematic and unsystematic risk. The equation for the characteristic line $($or regression

line$)$ is expressed as

rit $=$ ai $+\backslash$beta irmt $+$ ut

where ai $=$ the intercept for the i

th asset.

$\backslash$beta i $=$ the slope for the i

th asset, a measure of un$-$diversifiable risk.

ut $=$ the random error around the regression line for security i during

time period t $.$

The model shows the relationship of one security with the market. It is

sometimes called a market model for one security. OLS regressions are

formulated so that the error terms ut average out to zero. As a result,

the characteristic line is normally written $($without the time subscripts$)$

as

ri $=$ ai $+\backslash$beta irm

$($i$)$ Interpret the alpha $($intercept$)$ coefficient, term $,$ for security i$.[0\mathrm{.}5$

marks$]$

$($ii$)$ Interpret the beta coefficient, term $\backslash$beta i

$.[0\mathrm{.}5$ marks$]$

$($iii$)$ Discuss the market imperfections which preclude attainment of

Capital Asset Pricing Model complete equilibrium.