(a) Using the data in 1, Appendix 5.A, estimate the following LR model for the Intel log-returns (yt): Yt = 0 + 1x1t + 1x1t

(a) Using the data in 1, Appendix 5.A, estimate the following LR model for the Intel log-returns (yt):

Yt = β0 + β1x1t + β1x1t + ut, (14.91)

where x1t= log-returns of the market (SP500) and x2t= log-returns of 3-month treasury bills and .

(b) Explain the relationship between the statistical model in (14.91) and the CAPM model:

(Yt − x2t) = α0 + α1(x1t − x2t) + t (14.92)

and discuss how one can test the validity of the restrictions the substantive model in (14.92) imposes on the statistical model in (14.91).

(c) Explain why the traditional test for the validity of the CAPM, α0 = 0, ignores another crucial restriction.