A financial analyst believes that the best way to predict a firm\'s returns is b

Question

A financial analyst believes that the best way to predict a firm's returns is by using th earnings ratio (PIE) and its price-to sales ratio (P/S) as explanatory variables. He estimates th regression, using 30 large firms: Retum 33.63 3.82PE -3.26P/S, SSE-5,010.37, n -30 A colleague suggests that he can improve on his prediction if he also includes the P/E-to-growth ratio (PEG) and the dividend yield (DIV). He re-estimates the model by including these explanatory variables obtains Retum =-33.18 + 4.46P/E-2.70P/S-1 1.43PEG + 3.80DIV, sSE = 4,147.80, n#30. Use Table 4. a. Chose the appropriate hypotheses to determine whether including the PEG and DIV variables impacts Ho: 3-4-0; HA: At least one of the coefficients is greater than zero. O Ho: 3-A4 = 0; HA: At least one of the coefficients is nonzero. Ho: 3" -0; HA: At least one of the coefficients is less than zero. b. Calculate the value of the test statistic. (Round your intermedilate calculations to 4 decimal places and final answer to 2 decimal places.) Test statistic 2.6 C. Find the critical value at the 5% significance level. (Round your answer to 2 decimal places.) Critical value

Explanation / Answer

Numerator degrees of freedom = 2

Deominator degrees of freedom = 30 - 3 = 27

Hence,

Critical value at 5% = 3.35

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