Question

An analyst estimates the index model for a stock using regression analysis involving total returns, not the excess return. The estimated intercept in the regression equation is 6% and the β is 0.5. The risk-free rate of return is 12%. The true β of the stock is

Answer 1

Answer:

The true β of the stock is 0%

Explanation:

6% = a + 12% (1 − 0.5); a = 0%.

Answer 2

Answer:

The true β of the stock is 0

Explanation:

The regression equation for the stock would be given as,

y = βo + β1X1

The information given to us in the question is:

y = 6%

βo = 12%

X1 = (1 - 0.5)

Putting the information in the equation,

6% = a + 12% (1 - 0.5);

6% = a + 6%

a = 6% - 6%

a = 0