Theory

Table 6.1 gives data on the annual rates of return (%) on Afuture Fund, a mutual fund whose primary investment objective is maximum capital gain, and on the market portfolio, as measured by the Fisher Index, for the period 1971-1980.

In exercise 5.5 we introduced the characteristic line of investment analysis, which can be written as

where Y, = annual rate of return (%) on Afuture Fund Xi = annual rate of return (%) on the market portfolio

P, = slope coefficient, also known as the Beta coefficient in portfolio theory, and ai = the intercept

In the literature there is no consensus about the prior value of ai. Some empirical results have shown it to be positive and statistically significant and some have shown it to be not statistically significantly different from zero; in the latter case we could write the model as

that is, a regression through the origin.

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