2. Linear Regression Consider the following return of the Performance Fund and t

Question

2. Linear Regression Consider the following return of the Performance Fund and the Excess Return on the Market Index for the same yeair: Table 1: Excess Return on the Market Index and Return of the Performance Fund Year Market Fund 2012 13.717.8 201323.2 20146.9 2015 16.8 2016 12.3 39 12.8 24.2 17.2 2.1. Calculation: Use the Ordinary Least Squares procedure to find out if there is a relationship between the Performance Fund y and the Excess Return on the Market Index r! in 2017, what would be the expected return of the Performance Fund? results! 22. Calculation: If the Market is expected to have an Excess Return of 15% 2.3. Calculation: Estimate the Standard Errors of and and discuss your

Explanation / Answer

The data analysis is performed on Minitab software:

Regression output:

The regression equation is:
y(performance fund) = - 1.74 + 1.64*x(return on market index)

Predictor                   Coef SE Coef          T P
Constant                              -1.737       4.114          -0.42    0.701
x(return on market index)        1.6417    0.2648        6.20     0.008

S = 3.17941   R-Sq = 92.8% R-Sq(adj) = 90.3%

2.1) Using the ordinary least square procedure we find out the least square regression equation.

Alpha= -1.737 & Beta=1.6417

2.2) Thus when x=15, then predicted y is =22.86. Thus if the market is expected to have a Excess return of 15% in 2017 then the expected return of the performance Fund is 22.86.

2.3) standard error(alpha)=4.114

      Standard error(beta)=0.2648

Thus we can see that the R-squared value is 0.928 which means that 92.8% of the total variability in y is explained by the regression equation of y on x and the fit is very good.

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