Question

In: Statistics and Probability

Use regression analysis to estimate the market model for Company A and Company B, and the equally weighted portfolio.

Use regression analysis to estimate the market model for Company A and Company B, and the equally weighted portfolio.

a. Interpret the regression slope coefficient (beta) in the context of the market model for each of the 3 assets.

b. Interpret the coefficients of determination (R²) in the context of the market model (systematic and nonsystematic risk).

The calculations can be done with Excel’s Data Analysis “Regression” function, clicking on “Line Fit Plots” in the dialogue box to see the fitted line.

			Monthly Stock Returns

	Year	Month	S&P 500 Index	A	B
1	2010	January	0.02851	0.09223	0.02822
2	2010	February	0.05880	0.10163	(0.00017)
3	2010	March	0.01476	0.09005	(0.01001)
4	2010	April	(0.08198)	(0.10765)	(0.01726)
5	2010	May	(0.05388)	(0.01133)	(0.01810)
6	2010	June	0.06878	0.16893	0.02765
7	2010	July	(0.04745)	(0.06577)	(0.02444)
8	2010	August	0.08755	0.20749	0.00505
9	2010	September	0.03686	0.00441	0.06815
10	2010	October	(0.00229)	0.07642	(0.03929)
11	2010	November	0.06530	0.10699	0.05330
12	2010	December	0.02265	0.04067	(0.01128)
13	2011	January	0.03196	0.06098	(0.00134)
14	2011	February	(0.00105)	0.08187	(0.02302)
15	2011	March	0.02850	0.04078	0.06244
16	2011	April	(0.01350)	(0.08331)	0.03238
17	2011	May	(0.01826)	0.00627	(0.05128)
18	2011	June	(0.02147)	(0.06810)	(0.02479)
19	2011	July	(0.05679)	(0.07893)	0.03559
20	2011	August	(0.07176)	(0.18854)	(0.00786)
21	2011	September	0.10772	0.28633	0.02112
22	2011	October	(0.00506)	0.03621	0.00905
23	2011	November	0.00853	(0.07440)	0.03314
24	2011	December	0.04358	0.20986	(0.04742)
25	2012	January	0.04059	0.04667	0.07256
26	2012	February	0.03133	(0.06733)	(0.00607)
27	2012	March	(0.00750)	(0.03120)	(0.04502)
28	2012	April	(0.06265)	(0.14734)	(0.02125)
29	2012	May	0.03955	(0.03103)	(0.01665)
30	2012	June	0.01260	(0.00180)	0.06276
31	2012	July	0.01976	0.01322	0.04109
32	2012	August	0.02424	0.00830	0.03241
33	2012	September	(0.01979)	(0.00835)	0.00640
34	2012	October	0.00285	0.00510	0.00852
35	2012	November	0.00707	0.05735	(0.02778)
36	2012	December	0.02171	0.04899	0.00913

Expert Solution

FOR COMAPANY A

a. Interpret the regression slope coefficient (beta) in the context of the market model for each of the 3 assets.

Slope is 1.87624552

So if S&P 500 index increses to 1 unit then response variable will inrecreses into 1.8762 unit .

b. Interpret the coefficients of determination (R2) in the context of the market model (systematic and nonsystematic risk).

Coefficient of determination = 0.67

that means 67% variation explained by responce variable to the regressior S&P 500 index .

Best fit line plot

FOR COMPANY B

a. Interpret the regression slope coefficient (beta) in the context of the market model for each of the 3 assets.

Slope is 0.2722

So if S&P 500 index increses to 1 unit then response variable will inrecreses into 0.2722 unit .

b. Interpret the coefficients of determination (R2) in the context of the market model (systematic and nonsystematic risk).

Coefficient of determination = 0.1224

that means 12.24% variation explained by responce variable to the regressior S&P 500 index .

Best fit line plot

orchestra answered 2 years ago

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