A finance executive would like to determine if a relationship exists between the current earnings per share (EPS) of a bank and the following independent variables:
• Total assets ($ billions)
• Previous period’s EPS
• Previous period’s return on average assets (ROAA)
• Previous period’s return on average equity (ROAE)
ROAA measures how effectively assets are utilized, and ROAE measures a firm’s profitability. The Excel file Bank EPS. xlsx contains these data for several banks.
a. Using PHStat, check for the presence of multicollinearity.
b. If multicollinearity is present, take the necessary steps to eliminate it.
c. Perform a general stepwise regression using α = 0.05 for the p value to enter and to remove independent variables from the regression model.
d. Identify the regression equation for the model in part c.
e. Perform a residual analysis with the model in part c to verify that the conditions for the model are met.