What is the right choice? Between 1981 and 1993, the R-squared value was about 7

Question

What is the right choice?

Between 1981 and 1993, the R-squared value was about 75% for the linear equation using the amount of butter produced in Bangladesh to predict the value of the S&P 500 stock index. Select the most likely explanation for the strong linear relationship.

A) Butter from Bangladesh is almost exclusively consumed in the US. More demand for butter indicates a strong economy, coinciding with a rising stock market. Less demand for butter indicates a weak economy, coinciding with a declining stock market.

B) Many US firms listed on the S&P 500 had heavy investments in the dairy industry in Bangladesh, so that rising or falling butter production in Bangladesh affected a large number of stock values.

C) High profits for dairies in Bangladesh provide the industry with extra cash. The institutional dairies and individuals who profit from them seek places to invest their extra cash. Most of that cash tends to be invested in companies listed in the S&P 500 stock index. Higher production of butter in Bangladesh leads directly to increased investment in S&P 500 companies.

D) High profits for dairies in Bangladesh provides the industry with extra cash. The institutional dairies and individuals who profit from them spend that cash on items produced by companies that tend to be part of the S&P 500 stock index. Thus, higher production of butter in Bangladesh leads to increased revenue for S&P 500 companies.

E) Coincidence

Explanation / Answer

Sol)

B) Many US firms listed on the S&P 500 had heavy investments in the dairy industry in Bangladesh, so that rising or falling butter production in Bangladesh affected a large number of stock values.

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