6. You estimate a regression of the form given by equation (4.55) below in order to...

 

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6. You estimate a regression of the form given by equation (4.55) below in order to evaluate the effect of various firm-specific factors on the returns of a sample of firms. You run a cross-sectional regression with 200 firms Ti = Bo + B1 Si + B₂MB₁ + B3PE¡ + B₂BETA¡ + U₁ (4.55) where: r; is the percentage annual return for the stock S; is the size of firm i measured in terms of sales revenue MB; is the market to book ratio of the firm PE; is the price/earnings (P/E) ratio of the firm BETA; is the stock's CAPM beta coefficient You obtain the following results (with standard errors in parentheses) = 0.080+ 0.801S; + 0.321 MB; + 0.164PE; - 0.084BETA; (0.064) (0.147) (0.136) (0.420) (0.120) (4.56) Calculate the t-ratios. What do you conclude about the effect of each variable on the returns of the security? On the basis of your results, what variables would you consider deleting from the regression? If a stock's beta increased from 1 to 1.2, what would be the expected effect on the stock's return? Is the sign on beta as you would have expected? Explain your answers in each case. 6. You estimate a regression of the form given by equation (4.55) below in order to evaluate the effect of various firm-specific factors on the returns of a sample of firms. You run a cross-sectional regression with 200 firms Ti = Bo + B1 Si + B₂MB₁ + B3PE¡ + B₂BETA¡ + U₁ (4.55) where: r; is the percentage annual return for the stock S; is the size of firm i measured in terms of sales revenue MB; is the market to book ratio of the firm PE; is the price/earnings (P/E) ratio of the firm BETA; is the stock's CAPM beta coefficient You obtain the following results (with standard errors in parentheses) = 0.080+ 0.801S; + 0.321 MB; + 0.164PE; - 0.084BETA; (0.064) (0.147) (0.136) (0.420) (0.120) (4.56) Calculate the t-ratios. What do you conclude about the effect of each variable on the returns of the security? On the basis of your results, what variables would you consider deleting from the regression? If a stock's beta increased from 1 to 1.2, what would be the expected effect on the stock's return? Is the sign on beta as you would have expected? Explain your answers in each case.

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Here are the tratios for each variable Si 08010147 545 MBi 03210136 236 PEi 01640420 039 BET... View the full answer