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(ri rf ) i i (rm rf ) ei
i = expected return of stock i if markets excess return is zero
i(rmt - rft) = component of return due to market movements
eit = component of return due to unexpected firm-specific events
Textbook notation:
Ri = ri rf and Rm = rm - rf
Therefore,
Ri i i Rm ei
Early Application
Therefore,
Cov(Ri, Rj) = Cov(iRM, jRM ) = ijs2M
p p Rm e p
The variance ofRR
p pis:
Regression analysis
Intercept is i, slope is
alpha
beta
statistical significance
The Meaning of R2
The goodness-of-fit measure, R2, from the
Single Index Model regression (the SCL) is:
2 2
2
s
s
(ei )
2
i
m
R
1
2
si
s i2
Industry Versions
Industry Versions
Beta books
1.4 RTSX
Rc R p RT 0.04 e p