Your data indicates that the stock market indices of all the countries studied increased between 2005 and

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Question:

Your data indicates that the stock market indices of all the countries studied increased between 2005 and 2006. Unexpectedly, interest rates for all but one country also increased during that period. Perhaps this is partially due to the positive inflation rates in all of these countries. You would like to find out more information. However, there are variations in the direction and the size of these changes for each country and this complicates your analysis.

a. The stock prices.xls Excel spreadsheet shows the change in stock market indices between 2005 and 2006 as a percentage of the 2005 indices. It also shows the change in interest rates between 2005 and 2006 as a percentage of 2005 interest rates. Use Excel to calculate the mean and standard deviation for the percent changes in market indices. Perform the same calculations for the percent changes in interest rates. What do these numbers indicate?

b. Conduct a hypothesis test to see if the mean percent change in stock market indices between 2005 and 2006 are significantly different from zero. Do it without Excel. Conduct the same test for the mean percent change in interest rates. Use a significance of .05. How do you interpret your findings?

Q. 2. The results of your answer to question 1 will allow you to compare the mean percent change in stock market indices and mean percent change in interest rates for the countries studied. However, they will not show how changes in market indices are related to changes in interest rates.

a. Use Excel to create scatter plot for these two variables. Comment on whether you believe there is a relationship between percent changes in market indices and percent changes in interest rates. If you see a relationship, is it a positive or a negative one? As the change in interest rates increases, do you believe the change in stock market indices increases or decreases? How can you explain this? Do you see an unusual observation (i.e., outlier), which might be excluded from this sample of data? If so, what country is it?

b. Use Excel to conduct a regression analysis of these two variables. Use the data from all eighteen counties. Let percent changes in the interest rate are independent or explanatory variable (X) and percent changes in stock market indices be the dependent variable (Y). (The dependent variable is what you are trying to predict.) Interpret your regression findings by discussing the coefficient of determination (i.e., R-square), the the regression coefficient of interest rate change, and the p-value. Is the regression coefficient of Is X significantly different than zero? What does this mean?

c. Did you identify an outlier in part a? If so, discard the outlier and run the regression again. Do results change?

Q. 3. Now use Excel to do regression of the inflation rate (X) on the percent changes in the stock market indices (Y). Include the data from all eighteen countries, including Japan. Use a significance of .05. Interpret your results (R-square, regression coefficient, and p-value). How would inflation in a foreign country affect the value of foreign profits for a U.S. investor? Explain your answer.

Q. 4. What additional macroeconomic variables should an investor consider when comparing foreign versus domestic investments?