Question

Stock market analysts are continually looking for reliable predictors of stock prices. Consider the problem of modeling the price per share of electric utility stocks (Y). Two variables thought to influence this stock price are return on average equity (X1) and annual dividend rate (X2). The stock price, returns on equity, and dividend rates on a randomly selected day for several electric utility stocks are provided below.

a) Use Excel to develop the equation of the regression model.Comment on the regression coefficients. Determine the predicted value of y for x1=12.1 and x2 = 3.18

b) Study the ANOVA table and the ratios and use these to discuss the strengths of the regression model and the predictors. Does this model appear to fit the data well? Use alpha = 0.05.

C) Comments on the overall strength of the regression model in light of se, R2, and adjusted R2.

Electric Utility	Stock Price	Return Average Equity	Annual Dividend Rate
1	$23	13.7	2.36
2	$34	12.8	3.12
3	$20	6.9	2.48
4	$24	12.7	2.36
5	$20	15.3	1.92
6	$13	13.3	1.60
7	$33	14.6	3.08
8	$15	15.8	1.52
9	$26	12.0	2.72
10	$25	15.3	2.56
11	$26	15.2	2.80
12	$20	13.7	1.92
13	$28	15.4	2.92
14	$25	15.2	2.60
15	$30	17.3	2.76
16	$20	13.9	2.14

Answer 1

X1- Return on average equity

X2- Annual dividend rate

Y- Stock Price

Y = f(X1,X2)

Here is the regression output-

SUMMARY OUTPUT

a)

Y = -9.95 +0.47*X1 +11.19*X2

Intercept is -9.95 which theoretically means if the return on average equity and annual dividend rate are 0, the intercept will be the stock price

X1 and X2 are positively correlated with the stock price and the coefficients tell us the extent to which they are correlated

put x1=12.1 and x2=3.18

Y=-9.95+0.47&12.1+11.19*3.18 = 31.32

b) yes, this model appears to fit the data well

c)

R Square = 0.92

It means that 92% of the variation in X1 and X2 can be explained by Y

Adj R Square = 0.91

It means that upon addition of extra variables R Square increases but adjusted R Square falls which means that the extra variable added here, X2 does not contribute highly to the change in Y

At this level of R-square, it appears that predictions of price from this equation will be very accurate