One of the most important questions in financial economics is what factors determine the cross-sectional variation in an asset's returns. Some have argued that book-to-market ratio and size (market value of equity) play an important role.
A. Write a multiple regression equation to test whether book-to-market ratio and size explain the cross-section of asset returns. Use the notations below.
(B/M) i = book-to-market ratio for asset i
R i = return on asset i in a particular month
Size i = natural log of the market value of equity for asset i
B. The table below shows the results of the linear regression for a cross-section of 66 companies.
The size and book-to-market data for each company are for December 2001.
The return data for each company are for January 2002.
Results from Regressing Returns on the Book-to-Market Ratio and Size

Determine whether the book-to-market ratio and size are each useful for explaining the cross-section of asset returns. Use a 0.05 significance level to make your decision.

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Coefficient Standard Error Intercept 0.1644 0.0825 (B/M); -0.0541 0.0588 Size; 0.0350 -0.0164 n = 66