When we set up a regression model, we start off we computing the slope coefficient, b1 and the intercept, bo. To determine these 2, we compute the required data such as covariances and variances. After which we will obtain our regression model which we can use to predict future values of the dependent variable.
Market model is a linear regression of return of stock against market return (the independent variable). However in Schweser note (for portfolio management), it was stated that the market model is used to estimate beta, the slope coefficient. Isn’t the model use to predict return on stock (ie the dependent variable)? Isn’t the slope coefficient determine by taking Covariance of X and Y divided by Variance of X?
Im confused can someone explain?
Thanks!
Cheers,
Ernest