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

In the market model, R_i = α_i + β_i R_m + ε_i, the slope coefficient β_i is most likely estimated as the:

Beta in the market model is the covariance of the asset's returns with the market's returns divided by the variance of the market's returns. This is the ordinary least squares slope from regressing asset returns on market returns.

  1. Acovariance of the asset's returns with the market's returns divided by the variance of the market's returnsCorrect
  2. Bcorrelation between the asset's returns and the market's returns divided by the market's variance
  3. Cvariance of the asset's returns divided by the covariance of the asset's returns with the market's returns

Explanation

The slope of a simple regression of asset returns on market returns equals Cov(Ri,Rm)/Var(Rm). Option B omits the standard deviation of the asset in the numerator, so it is not the slope. Option C inverts and misuses the terms.

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