Question
The table below contains output from a CAPM regression based on weekly data of returns in decimal form (i.e., a return data of 0.01 equals
The table below contains output from a CAPM regression based on weekly data of returns in decimal form (i.e., a return data of 0.01 equals 1% return) for the 2-year period that you have owned this stock.
R-squared of the regression: 0.06
Coeff. t-statistics
Intercept 0.001 0.72
Regression coefficient of the independent variable 1.85 5.12
A friend of you is of the opinion that there must be something wrong with the regression since the very low R-squared indicates that most of the risk of this stock is unsystematic risk and therefore the beta coefficient cannot be as high as estimated. Furthermore, your friend says that since the alpha of the regression is positive you should buy more of the stock.
Provide detailed comments on the correctness of your friends arguments assuming that the CAPM is the correct asset-pricing model.
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