The scatter plots below depict the relation between excess returns of two stocks and the market excess return. In each graph, the market excess return is on the x-axis and the stock excess return is on the y-axis. The dashed line is estimated using a single-variable linear regression and represents the best linear fit:

f you are trying to find these two stocks on the Security Market Line, Stock B is located

Question

The scatter plots below depict the relation between excess returns of two stocks and the market excess return. In each graph,  the market excess return is on the x-axis and the stock excess return is on the y-axis. The dashed line is estimated using a single-variable linear regression and represents the best linear fit:

f you are trying to find these two stocks on the Security Market Line, Stock B is located

BlackTom AI · Accepted Answer

A positive regression intercept (alpha) implies Stock B lies above the Security Market Line.

1) Relevant concepts
- Capital Asset Pricing Model (CAPM) / Security Market Line (SML): the expected excess return of any asset should equal its beta times the expected market excess return. In excess-return form: E[ri − rf] = βi · E[rM − rf]. Points on the SML have zero abnormal return (alpha = 0).
- Single‑variable regression of realized excess returns: ri,t − rf,t = αi + βi (rM,t − rf,t) + εi,t. Here αi is the average abnormal excess return; if αi > 0 the asset has delivered returns above CAPM prediction (i.e., lies above the SML for its beta).

2) Step‑by‑step reasoning
- The plotted dashed line is the OLS fit; its slope is an estimate of β and its intercept is the estimated α.
- For Stock B the dashed line has a positive vertical intercept (points lie, on average, above the line through the origin implied by CAPM). That is, the estimated αB > 0.
- A positive α means the stock’s average excess return exceeds βB · E[rM − rf], so the stock’s expected return is higher than what the SML predicts for its beta.

3) Intermediate/calculation concept
- In sample terms: α̂ = mean(ri − rf) − β̂ · mean(rM − rf). If α̂ > 0 (as visually evident for Stock B), then mean(ri − rf) > β̂ · mean(rM − rf) — the realized average excess return is above the CAPM prediction.

4) Why the correct answer is correct
- Because Stock B’s regression shows a positive intercept, it has positive abnormal return relative to CAPM; graphically and conceptually that places it above the SML.

5) Why other options are incorrect
- “Below the Security Market Line” would require α < 0 (negative intercept), which the plot does not show.
- “On the Security Market Line” requires α = 0 (the dashed fit passing through the origin in excess-return space), which is false for Stock B.
- “Cannot be determined” is incorrect because the sign of the estimated intercept is visible and gives the needed information.

6) Conclusion
Therefore Stock B is located above the Security Market Line, which matches the provided answer.

类似问题

For stock A, we have 𝛽 𝑖 = 0.70. Suppose the expected market risk premium next year is 9% and the risk-free rate is 3%. What is the expected return of this stock based on the CAPM? (Please answer in % and round to 2 decimal places. If the answer is 8.057%, then in the box, write 8.06)

The following graph shows the Security Market Line in the current economy. If a stock has a β of 1.2, what is the expected return of this stock based on the CAPM? (Please answer in % and round to 2 decimal places. If the answer is 8.057%, then in the box, write 8.06)

Which of the following is an implication of the CAPM in equilibrium?

According to the CAPM, the key determinant of a stock’s expected return is

Firms with lower investment rates tend to

If all investors become more risk averse, the SML will and stock prices will .[Fill in the blank]

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