F IL E George believes th a t returns o f m utual funds are influenced by annual turnover rates and annual expense ratios. In order to substantiate his claim, he random ly selects eight m utual funds and collects data on each fund's five-year annual return (Return), its annual holding turnover rate (Turnover), and its annual expense ratio (Expense). The data set can be found on the te xt website, labeled Turnover and Expense.

Return (%) Turnover (%) Expense(%)

American Funds EuroPacific 6.06 41 0.83 Artisan International 2.94 54 1.22 Royce Value Plus 1.48 42 1.48 SOURCE: A ll d a ta a s o f J u ly 3 1 , 2 0 0 9 fr o m fin a n c e .y a h o o .c o m .

a. Estimate Return = β 0 + β1 Turnover + β 2 Expense + ε .

Conduct appropriate tests to verify George's theory at the 5% significance level.

b. Discuss the potential problem s o f m ulticollinearity and heteroskedasticity.