Regression epsilon of the return distribution

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Description

The regression epsilon is an error term measuring the vertical distance between the return predicted by the equation and the real result.

Usage

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CAPM.epsilon(Ra, Rb, Rf = 0, ...)

Arguments

Ra

an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns

Rb

return vector of the benchmark asset

Rf

risk free rate, in same period as your returns

...

any other passthru parameters

Details

epsilon_r = r_p - alpha_r - beta_r * b

where α_r is the regression alpha, β_r is the regression beta, r_p is the portfolio return and b is the benchmark return

Author(s)

Matthieu Lestel

References

Carl Bacon, Practical portfolio performance measurement and attribution, second edition 2008 p.71

Examples

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data(portfolio_bacon)
print(SFM.epsilon(portfolio_bacon[,1], portfolio_bacon[,2])) #expected -0.013

data(managers)
print(SFM.epsilon(managers['1996',1], managers['1996',8]))
print(SFM.epsilon(managers['1996',1:5], managers['1996',8]))

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