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Consider the regression model:

rcon, the (excess) rate of return on a portfolio with construction industry assets,

rmrf, the (excess) rate of return on a market-wide well-diversified portfolio,

$$ \mathrm{rcon}_i = \beta_1 + \beta_2\mathrm{rmrf}^2_i + e_i $$

Does that regression make sense?

spaceisdarkgreen
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Lukas Fan
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  • It's certainly a little strange that there's no linear term. But really, we're going to need more context in order to answer this. What is this and why do you expect maybe it doesn't make sense? Also, please learn to enter equations with mathjax rather than linking. (See my edit for the mark-up). – spaceisdarkgreen Aug 27 '18 at 04:16
  • this is a question from my tutorial. it just simply asking this the regression make sense... so im not to sure what does she expect from us. – Lukas Fan Aug 27 '18 at 04:26
  • It is not unusual to regress industry returns on market returns. I would suggest you graph the shape of this regression function and consider reasons why it might not make economic sense. For instance, compare the expected industry return if the market return is $+1%$ with that is the market return is $-1%.$ A full description of what is wrong would depend on the purpose of the regression, though. – spaceisdarkgreen Aug 27 '18 at 04:48

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