Answered: Suppose you regress the annual…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose you regress the annual percentage stock price returns on Russell 2000 small cap index for on a the percentage annual returns for a market index. Use the following output from this linear regression to answer questions a. - f.

a. What is the formula for the Russell 2000's characteristic line?

b. You forecast a market return of 6% next year. According to the market model, what is next year's expected return for the Russell 2000 index?

c. What is the correlation between the return on the Russell 2000 and the return on the market Index?

d. How much of the variation in the Russell 2000's returns are explained by the model?

e. Based on these regression results, the Russell 2000 index would be considered what kind of an investment, defensive, aggressive, or market neutral?

f. Does this regression have much explanatory power? Why or why not?

Russell 2000 on Wilshire 5000
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjus ted R Square
0.93
0.86
0.86
Standard Error
0.79
Observations
53.00
ANOVA
df
SS
MS
Significance F
Regression
1.00
192.05
192.05
308.57
0.00
Residual
51.00
31.74
0.62
Total
52.00
223.79
Coefficients Standard Error
t Stat
P-value
Intercept
Wilshire 5000
0.05
0.11
0.43
0.67
1.37
0.08
17.57
0.00

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