A financial analyst believes that the best way to predict a firms returns is by using the

Question:

A financial analyst believes that the best way to predict a firm’s returns is by using the firm’s price-to-earnings ratio (P∕E) and its price-to sales ratio (P∕S) as explanatory variables. He estimates the following regression, using 30 large firms:

SSE = 5,021.63; n = 30

A colleague suggests that he can improve on his prediction if he also includes the P∕E-to-growth ratio (PEG) and the dividend yield (DIV). He re-estimates the model by including these explanatory variables and obtains

+ 3.82DIV; SSE = 4,149.21; n = 30

At the 5% significance level, is the colleague’s claim substantiated by the data? Explain.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...