After obtaining the monthly share prices for Tesco and FTSE all index values for the last five
Question:
After obtaining the monthly share prices for Tesco and FTSE all index values for the last five years, you run an ordinary least square regression between the monthly returns on Tesco and the returns on FTSE All index. You obtain the following regression outputs on Excel.
Regression Statistics | |
Multiple R | 0.354797921 |
R Square | 0.125881565 |
Adjusted R Square | 0.110546154 |
Standard Error | 0.070047679 |
Observations | 59 |
ANOVA | |||||
df | SS | MS | F | Significance F | |
Regression | 1 | 0.040276731 | 0.040276731 | 8.208554927 | 0.005828653 |
Residual | 57 | 0.27968061 | 0.004906677 | ||
Total | 58 | 0.319957341 |
Coefficients | Standard Error | t Stat | P-value | |
Intercept | -0.01085817 | 0.009165034 | -1.184738563 | 0.241037201 |
X Variable 1 | 0.920882401 | 0.321418462 | 2.865057578 | 0.005828653 |
Required
(a) (i) What is the estimated beta value for Tesco from the above regression outputs?
(ii) Identify the specific estimation errors relating to a regression approach as the above.
(iii) How could we improve the estimation accuracy?
(b) (i) Explain what the R square in the above Excel outputs measures.
(ii) Does it cast doubt about the validity of the Capital Assets pricing Model (CAPM)? Clearly explain your reasoning.