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The R code is correct. You could also use the I() operator. You can look here on page 53. The code then would be lm(stock~market+I(market^2)+I(market^3), data=example) EDIT: going more into detail: Doing the above you define regressors $market^2$ and $market^3$. The coefficients will be calculated the usual way (covariance of response with the regressors ...


Yes. If on the y axis you have excess returns, then the intercept of the line is zero. This are the implications of the CAPM model. E.g. for the SML: $E[R_i,t^e]=\beta \lambda_t$, where $R_i,t^e$ is the excess return on stock $i$ at time $t$ and $\lambda$ is the market price of risk.

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