RSM332H1 Lecture Notes - Lecture 10: Risk-Free Interest Rate, Efficient-Market Hypothesis, Idiosyncrasy
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Find relationship between two random variables x and y. Y = a + bx (line of best fit) T-test of 2 in absolute value is statistically significant. If regressor fails to explain, error term explains all of the variation. If both left and right side are of the same time (aka both of the same months) However, if rt+1 = february and rmt = january, the r2 crashes. (predictive regression) reason behind this is due to stock is hard to predict. Low r^2 states the fact that it is hard to predict stocks. They are systematic returns is captured by n-factor (such as industry, market statement) while the idiosyncratic risk is captured by epsilon. Needs to be expressed such that factors has 0 mean including epsilon. U = e(rit) and the intercept is the mean of the return of the stock. Apt equation lamba 1, lamba 2, are risk premiums in foc?? (check on this)
