Suppose we want to predict the annualized return of the five-year T-bill using the annualized return of the three-month T-bill with monthly observations from January 1993 to December 2002. Our analysis produces the data shown in Table 10.
TABLE 10 Regression with 3-Month T-Bill as the Independent Variable and 5-Year Treasury Bill as the Dependent Variable Monthly Observations, January 1993 to December 2002
Regression Statistics
R-squared......................................0.5829
Standard error.................................0.6598
Observations......................................120
Durbin-Watson...............................0.1130

Can we rely on the regression model in Table 10 to produce meaningful predictions? Specify what problem might be a concern with this regression.

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Coefficient 3.0530 Standard Error t-Statistic Intercept Three-month 0.2060 14.8181 0.0446 0.5722 12.8408