The version of the CAPM studied in this chapter specifies The version of the CAPM studied in this…

The version of the CAPM studied in this chapter specifies

The version of the CAPM studied in this chapter specifies a simple regression model as100 (St – rt) = α + 100 β (Mt – rt) + εwhere Mt are the returns on the market, St are the returns on the stock, and rt are the returns on risk-free investments. (See About the Data.) Hence, 100(Mt – rt) are the excess percentage changes for the market and 100(St – rt) are the excess percentage changes for the stock. What happens if we work with the excess returns themselves rather than the percentage changes? In particular, what happens to the t-statistic for the test of H0: a = 0?The version of the CAPM studied in this chapter specifies

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