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

Question

Cameron Cochran

Business

11 February, 11:29

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

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Answers (2)

Know the Answer?

Miriam Walker · Answer 1

The true β of the stock is 0%

Explanation:

6% = a + 12% (1 - 0.5); a = 0%.

Karlie Robinson · Answer 2

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