The risk-free rate of return is 2% and the market rate of return is 10%. A researcher wants to test the CAPM and run two step regressions. The first step is time series regression of hundreds of stock excess returns on the market excess returns. The second step regression is cross-sectional regression of the following type.

Where excess average return is regressed on beta estimate and standard deviation of residuals from first step regressions.

a) describe the expected values and signs of the coefficients ₀, ₁ and ₂ to support the standard finance CAPM model.

b) describe what a behavioralist would say about this model.