an 1mportant mouel tnat nnance proresslonals use to unuerstanu asset prlces 1s caueo tne uapita1 asset Pricing Model (CAPM). You will learn more about the CAPM in a future nance course. But the basic assumption of the model is that the rate of return on an individual stock is linearly related to the rate of return on the overall stock market. That is, each stock's rate of return is assumed to follow a linear regression model: K09): (k)+(k)X +e Us} where Ya\") is the rate of return of an individual stock (It) in some given time period t; X, is the rate of return of the entire stock market in that same time period; and 60:: J is the residual for stock k 1n that time period. The superscript (k)' s here are simply denoting the different stocks (Apple, Target etc), while the subscript t's are denoting the different time periods. Note that the market rate of return (X;) is a predictor common to all stocks. (The rate of return can be interpreted similarly to an interest rate. For example, if a stock was worth $100 yesterday and $102 today, then it gained 2%, for an implied daily rate of return of 0.02.) The ,81 (slope) term in this regression model is super important to nance professionals; they just call it \"beta\