Question: An analyst for Phidelity Investments wants to develop a regression model to predict the annual rate of return for a stock based on the price-earnings

An analyst for Phidelity Investments wants to develop a regression model to predict the annual rate of return for a stock based on the price-earnings (PE) ratio of the stock and a measure of the stock’s risk. The data found in the file Dat9-12.xls were collected for a random sample of stocks.

a. Prepare scatter plots for each independent variable versus the dependent variable. What type of model do these scatter plots suggest might be appropriate for the data?

b. Let Y = Return, X1 = PE Ratio, and X2 = Risk. Obtain the regression results for the following regression model:

Ŷi = b0 + b1X1i + b2X2i

Interpret the value of R2 for this model.

c. Obtain the regression results for the following regression model:

Ŷi = b0 + b1X1i + b2X2i + b3X3i + b4X4i

Where X3i = X12i and X4i = X2 2i. Interpret the value of R2 for this model.

d. Which of the previous two models would you recommend that the analyst use?

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a PE Ratio Risk PE2 Risk2 Return 74 10 548 10 76 111 13 1232 17 130 87 11 757 12 89 112 12 1254 14 1... View full answer

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