1. In this regression, Rt is the return on the stock and Rft is the risk-free rate for the same period. RMt is the return on a stock market index, such as the S&P 500 index. i is the regression intercept, and i is the slope (and the stock's estimated beta). t represents the residuals for the regression. The intercept, i , is often called Jensen's alpha. What does it measure? If an asset has a positive Jensen's alpha, where would it plot with respect to the SML?

Rt 2 Rft 5 i 1 i [RMt 2 Rft ] 1 t

2. Is the alpha of either ELY or the mutual fund significantly more or less than zero? (Hint: The alpha is the intercept.)

3. How do you interpret the beta for the stock and the mutual fund? (Hint: The beta is next to the coefficient.)

4. Which of the two regression estimates has the highest R-squared? Is this what you would have expected? Use the scatterplot to explain why