Diet Partners charges its clients a small management fee plus a percentage of gains whenever portfolio returns are positive. Cleo Smith believes that strong incentives for portfolio managers produce superior returns for clients. In order to demonstrate this, Smith runs a regression with the Diet Partners' portfolio return (in percent) as the dependent variable and its management fee (in percent) as the independent variable. The estimated regression for a 60-month period is
RETURN = - 3.021 + 7.062 (FEE)
...............(- 7.28)........ (14.95)
The calculated t-values are given in parentheses below the intercept and slope coefficients.
The coefficient of determination for the regression model is 0.794.
A. What is the predicted RETURN if FEE is 0 percent? If FEE is 1 percent?
B. Using a two-tailed test, is the relationship between RETURN and FEE significant at the 5 percent level?
C. Would Smith be justified in concluding that high fees are good for clients?