QUESTION ONE (i) You estimate a regression of the form given by the equation below in order to evaluate the effect of va

[answerhappygod]

Question One I You Estimate A Regression Of The Form Given By The Equation Below In Order To Evaluate The Effect Of Va 1 (78.64 KiB) Viewed 14 times

Question One I You Estimate A Regression Of The Form Given By The Equation Below In Order To Evaluate The Effect Of Va 2 (85.54 KiB) Viewed 14 times

QUESTION ONE (i) You estimate a regression of the form given by the equation below in order to evaluate the effect of various firm-specific factors on the returns of a sample of firms. You run a cross-sectional regression with 200 firms. r₁= Bo + B₁S₁ + B₂MB₁ + B3PE + BABETA, + u where: r is the percentage annual return for the stock; S, is the size of firm i measured in terms of sales revenue; MB, is the market to book ratio of the firm; PE is the price/earnings (P/E) ratio of the firm; BETA, is the stock's CAPM beta coefficient. You obtain the following results (with standard errors in parentheses). = 0.80 +0.801S, +0.321MB, +0.164PE-0.084BETA - (0.064) (0.147) (0.136) (0.420) (0.120) (a) Calculate the t-ratios. What do you conclude about the effect of each variable on the returns of the security? On the basis of your results, what variables would you consider deleting from the regression? (b) (c) If a stock's beta increased from 1 to 1.2, what would be the expected effect on the stock's return? (d) Is the sign on beta as you would have expected? (Explain your answers in each case.).
(ii) The capital asset pricing model (CAPM) can be written as E (R₂) = R₁ + B₁[E(Rm) -R₁] using the standard notation. The first step in using the CAPM is to estimate the stock's beta using the market model. The market model can be written as Ritai + BiRmt + Uit = where it is the excess return for security i at time t, Rmt is the excess return on a proxy for the market portfolio at time t, and uit is an i.i.d. random disturbance term. The coefficient beta in this case is also the CAPM beta for security i. A city analyst has told you that shares in Chris Mining plc have no systematic risk, in other words that the returns on its shares are completely unrelated to movements in the market. The value of beta and its standard error are calculated to be 0.214 and 0.186, respectively. The model is estimated over thirty-eight quarterly observations. a. Write down the null and alternative hypotheses. Test this null hypothesis against a two-sided alternative (Hint: deduce the test statistic, use the appropriate values from the t-tables, show using diagrams on whether the test statistic falls within the rejection region). b. Form and interpret a 95% and a 99% confidence interval for beta using the values given. Draw appropriate diagrams to denote confidence intervals.