In order to evaluate the effect of various firm-specific factors on the returns of a sample...

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In order to evaluate the effect of various firm-specific factors on the returns of a sample of firms, you run the following cross-sectional regression with 200 firms: T = Bo + B₁ Size₁ + B₂ MB₁ + B₂ PE₁ + B₂ BETA, +₁ where r is the percentage annual return of the stock i, Size, is the size of the firm measured by its market capitalisation, MB, is the market to book ratio of the firm, PE, is the price to earnings ratio and BETA, is the stock's CAPM beta coefficient. You obtain the following results: Constant Size MB PE BETA R² Coefficient Standard error 0.080 0.077 0.900 0.251 0.090 0.800 41.39% 0.250 0.400 0.030 0.520 a) Calculate the t-ratios for all the estimated coefficients. (15 marks) b) Comment on the signs, magnitudes and statistical significance of the estimated coefficients. In particular, using a significance level of 5%, assess the importance of the firm-specific factors for the returns of the firms. (15 marks) c) On the basis of your results, which variables would you consider deleting from the regression? (10 marks) d) If a stock's beta decreased from 1 to 0.8, what would be the expected effect on the stock's return? (10 marks) [TOTAL: 50 MARKS] In order to evaluate the effect of various firm-specific factors on the returns of a sample of firms, you run the following cross-sectional regression with 200 firms: T = Bo + B₁ Size₁ + B₂ MB₁ + B₂ PE₁ + B₂ BETA, +₁ where r is the percentage annual return of the stock i, Size, is the size of the firm measured by its market capitalisation, MB, is the market to book ratio of the firm, PE, is the price to earnings ratio and BETA, is the stock's CAPM beta coefficient. You obtain the following results: Constant Size MB PE BETA R² Coefficient Standard error 0.080 0.077 0.900 0.251 0.090 0.800 41.39% 0.250 0.400 0.030 0.520 a) Calculate the t-ratios for all the estimated coefficients. (15 marks) b) Comment on the signs, magnitudes and statistical significance of the estimated coefficients. In particular, using a significance level of 5%, assess the importance of the firm-specific factors for the returns of the firms. (15 marks) c) On the basis of your results, which variables would you consider deleting from the regression? (10 marks) d) If a stock's beta decreased from 1 to 0.8, what would be the expected effect on the stock's return? (10 marks) [TOTAL: 50 MARKS]

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Solution 1 For all the Bs we Calculate the TRatios manner of T Coefficientstandard ... View the full answer