Please comment the following statement (30 marks) 4) Analysts may use regression analysis to estimate the...

Please comment the following statement

4) Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of the beta of the asset.

5) According to the separation property, the determination of the optimal risky portfolio depends on personal preference.

6) A less risk-averse investor has a steeper indifference curve for the utility function. (5

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Expert Solution

4) Regression analysis refers to the statistical and mathematical expression that is used to define the connection or relationship between the dependent variable to the independent variable. Its slope explains the responsiveness or steepness of the variable, which is defined by beta (b), and its intercept shows the location of that variable that is written as ’a’.

Therefore, the given statement is true.

5) Separation property is used in financial analysis that helps to identify the interest and needs of the investors by dividing their interest into two groups, such as capital allocation and determination of the optimal risky portfolio. According to the separation property, capital allocations depend upon the personal level of risk or preferences. At the same time, the determination of an optimal risky portfolio is a mathematical condition that depends on the technical situation.

Therefore, the given statement is false.

6) According to the utility theory function, the risk associated with any investment cannot be quantified, but analysts may score the investor's risk level and satisfaction level. This theory explains that the more risk-averse a person will have a steeper indifference curve as they are less likely to trade-off their returns easily. Therefore, any change in the expected returns will have a small change in the standard deviation. Similarly, less risk-averse investors will have a relatively flatter indifference curve, which explains that the investor is relatively more sensitive with the change in the expected returns.

Therefore, the given statement is false.

Rahul Sunny answered 2 years ago

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