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CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models

An analyst estimates a stock's beta by regressing the stock's historical returns on the returns of a market index. The beta estimate is most likely equal to the:

Beta is the slope coefficient of the regression of the stock's returns on the market index returns. It equals the covariance of the stock and market divided by the market variance. The intercept measures alpha, a different quantity.

  1. Acorrelation between the stock and the index multiplied by the index variance
  2. Bslope coefficient of the regression lineCorrect
  3. Cintercept of the regression line

Explanation

In the market model R_i = alpha + beta R_m + error, beta is the slope of the regression. It equals Cov(i,m)/Var(m), not correlation times the index variance, and the intercept is alpha.

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