(1) The security characteristic line of modern investment analysis involves runn

Question

(1) The security characteristic line of modern investment analysis involves running the following regression: where r = the rate of return on a stock or security rm = the rate of return on the market portfolio represented by a broad market index such as S&P500;, and t time In investment analysis, B2 is known as the beta coefficient of the security and is used as a measure of market risk, that is, how developments in the market affect the fortunes of a given company Based on 240 monthly rates of return for the period 1956 to 1976, Fogler and Ganapathy obtained the following results for IBM stock. The market index used by the authors is the market portfolio index developed at the University of Chicago: n 0.7264+1.0598rmt se = (0.3001 ) (0.0728) 2-0.4710

Explanation / Answer

c)

H0: 1 = 0

H1: 1 0

t = 1(hat)/SE(1(hat))

t = 1.0598/0.0728

t = 14.557, The t-calculated is sufficiently large so we reject the null hypothesis at 5% level of significance.

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