Consider the Regression Equation: R_i − R_f = G₀

Multiple Choice

Consider the regression equation: r_i − r_f = g₀ + g₁b_i + g₂s²(e_i) + e_it
Where:
R_i − r_t = the average difference between the monthly return on stock i and the monthly risk-free rate
B_i = the beta of stock i
S²(e_i) = a measure of the nonsystematic variance of the stock i
If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₂, to be

A) 0.
B) 1.
C) equal to the risk-free rate of return.
D) equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate.
E) None of the options are correct.