The capital asset pricing model (CAPM) postulates that the mean return of each security (Y) should be linearly related to its Beta (X2), a measure of systematic risk. We examine this hypothesis by regressing Y on X2 using the following information on six stocks: 1. Say, we construct a theoretical model for mean stock return as: Yi=1+2X2i+ui Discuss the expected sign of a slope parameter. Why do we include stochastic error term (u) in our econometric model? 2. For a sample regression function, show that the variance of a slope estimator (b2) is equal to 2/x22 3. Compute and interpret the least square estimates of 1 and 2. 4. Test the hypothesis that Beta (X2) is a significant variable. [Hint: tab =4.3 ] 5. Construct and interpret a 95% confidence interval for 2. [Hint: ttab=4.3 ]