During the 1990s, investors made investment decisions based on market performanc

Question

During the 1990s, investors made investment decisions based on market performance. As the nature of investing shifted (more day traders and faster flow of information using technology), the relationship between market performance (Return) in percent and money flowing (Flow) into mutual funds ($ million) shifted. The least squares linear regression is shown below. Complete parts a through d. (You may assume that the assumptions and conditions for regression are met.) Flow=9278 +778Return a) Interpret the intercept in the linear model. Choose the correct answer below. A. The intercept is the actual value of the money Flow if the Return was 0%. B. The intercept is the actual value of the Return if the money Flow was $0. C. The intercept is the predicted value of the Return if the money Flow was $0. D. The intercept is the predicted value of the money Flow if the Return was 0%. b) Interpret the slope in the linear model. Choose the correct answer below. A. Fund Return increases by $778 million for every 1% increase in money Flow. B. Money Flow increases by $778 million for every 1% decrease in fund Return. C. Money Flow increases by $778 million for every 1% increase in fund Return D. Fund Return increases by $778 million for every 1% decrease in money Flow. c) What is the predicted fund Flow for a month that had a market Return of 0%? The predicted fund Flow is $ million. d) lf during this month, the recorded fund Flow was $5 billion, what is the residual using this linear model? Did the model provide an underestimate for overestimate for this month? The residual is million dollars. The model provided an for this month.

Explanation / Answer

a) Option d is correct. Intercept is the predicted value of money flow if the return was 0%.

b) Option C is correct. Money flow increases by $778 million for every 1% increase in fund returns.

c) For return = 0%,

Flow = 9278 + 778(0) = 9278

So,

Predicted fund flow is $9278 million. Answer is 9278.

d) Residual = yactual - ypredicted = $5000 - $9278 = - 3278 million dollars. The model provided an overestimate for this month.

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