In Section 3.2, we introduced one measure of risk used by nancial analysts, the standard deviation of

In Section 3.2, we introduced one measure of risk used by financial analysts, the standard deviation of rate of return. In this problem we will learn about a second measure of risk of a stock, the beta of a stock. The following data represent the annual rate of return of General Electric (GE) stock and the annual rate of return of the Standard & Poor’s 500 (S&P 500) Index for the past 15 years.

(a) Draw a scatter diagram of the data treating the rate of return of the S&P 500 as the explanatory variable.
(b) Determine the correlation coefficient between rate of return of the S&P 500 and GE stock.
(c) Based on the scatter diagram and correlation coefficient, is there a linear relation between rate of return of the S&P 500 and GE?
(d) Find the least-squares regression line treating the rate of return of the S&P 500 as the explanatory variable.
(e) Predict the rate of return of GE stock if the rate of return of the S&P 500 is 0.10 (10%).
(f ) If the actual rate of return for GE was 13.2% when the rate of return of the S&P 500 was 10%, was GE’s performance above or below average among all years the S&P 500 returns were 10%?
(g) Interpret the slope.
(h) Interpret the intercept, if appropriate.
(i) What proportion of the variability in GE’s rate of return is explained by the variability in the rate of return of the S&P 500?

Transcribed Image Text:

Year Rate of Return of S&P 500 Rate of Return of GE 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0.203 0.310 0.267 0.195 0.101 0.130 0.234 0.264 0.090 0.030 0.128 0.035 0.385 0.235 0.067 0.402 0.510 0.410 0.536 0.060 0.151 -0.377 0.308 0.207 0.014 0.093 0.027 0.593 0.102 0.053