Question

A stock advisor claims that Berkshire Hathaway, the investment co. run by Warren Buffett, generates ‘positive alpha.’  How can we test this using a regression model?  What are we looking for in the regression output?  Write out the regression and state what we are looking for.

Answer 1

When we will be trying to run a regression output, we will be trying to find out whether the company's current performance is is exceeding the past rate of return or it is under performing the past performance best upon the performance of the independent variable.

We will be trying to ascertain by running a regression model that performance of Berkshire Hathaway has consistently beaten the performance of standard index or not and it will be meaning that positive Alpha is generated.

Positive Alpha is a representation of excess rate of return which is generated by the Berkshire Highway over the standard rate of return of the index and we will be trying to run a regression model in order to find out the performance of the Berkshire Hathaway in respect to the the standard index and running a regression model is inclined towards finding out the performance of one variable against the another variable and it will be dependent upon the past performance and past Trends so we will be able to find out the positive Alpha which had been generated by the company over the standard index.

Y= a+bx

it will be reflecting the performance of a dependent variable in respect of an independent variable so when the independent variable will be moving, how the dependent variable is performing and in this case we will be trying to find out that dependent variable is the Berkshire Hathway rate of return whereas independent variable will be the standard and poor 500 rate of return and we will be trying to find out the actual deviation and Alpha generation of the Berkshire Hathaway in respect to the standard and poor 500. We are looking to find out the excess rate of return which has been generated by Berkshire Hathaway over standard and poor 500