It can be conjectured that the annual rate of return of a security and the market rate
Question:
- It can be conjectured that the annual rate of return of a security and the market rate of return return are related by the following regression model
y = mx + b + ε
Where y is the annual rate of return of the security, x is the annual rate of return of the market, b is the intercept, Ɛ is the normally distributed noise, and
Rate of return = (value at end of the year + received dividends during the year - value at the beginning of the year)/(initial value)
Test this model by retrieving annual data on a security of your choice. Choose a financial index such as S&P 500 as the indicator of the market, and retrieve the data. Use the most recent 20 years as the time span of the data. Perform regression analysis and make sure to include the hypothesis in your study. Provide your results and write your conclusions. Include all relevant information and conclusions, significances, the final regression model, coefficient of determination, graph of the regression line accompanied in the scatterplot, extent of residuals, and normality of residuals. Does the model seem to be valid according to your study? If so, is the influence positive or adverse? If you conclude influence, then your regression model indicates outperformance or underperformance of the market? Explain all your work in detail.
** it can be any security and the S&P 500 index historical data can be found on yahoo finance.
Expert Answer:
Step 1 Regression analysis Regression Analysis is used to estimate the relationship between one depe... View the full answer
Principles of managerial finance
ISBN: 978-0132479547
12th edition
Authors: Lawrence J Gitman, Chad J Zutter
