marks People Window Help 52% Mia: Student Question uiz action takeQuiz&quiz; pro
ID: 3226740 • Letter: M
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marks People Window Help 52% Mia: Student Question uiz action takeQuiz&quiz; probGuid QNAPcoA8010100000036b9d1boo60000&ctx; Market model is a term used in finance to describe a linear regression model in which the dependent variable is the return on a stock and the independent variable is the return on the overall market. The market model is sometimes extended to include other independent variables-for example, the return industry sector. on a specific Company A is one of the leading software companies in the world. Suppose an analyst in an investment bank is creating a market model to predict returns on Company A stock from both market and industry returns. The multiple regression model is: Ao 81x1 B2x2 E where y daily returns for Company A stock x1 daily returns for the Dow Jones Industrial Average x2 daily returns for the NASDAQ Computer Index Returns for the Dow Jones Industrial Average (DJIA) will indicate market returns, while those for the NASDAQ Computer Index (NCI) will indicate industry returns. The analyst estimates the parameters Bo, B1, and B2 using daily returns for the period January 3, 2005, through December 30, 2005. The estimated multiple regression equation is: y 0.0008 +0.6404x1 +0.6869x2 The coefficient 0.6404 in the estimated multiple regression equation is: Q The estimated change in average company A stock return for a one-unit change in DJIA return, keeping the NCI return constant Q The estimated change in average company A stock return for a one-unit change in NCI return, keeping the DJIA return constant Q The estimated verage Company A stock return when the DJIA and NCI are zero Q The estimated increase in average Company A stock return when the DJIA and NCI returns change by one unit Based on his study, the analyst expects an upturn for the overall market and the computer industry. He expects a 1% 0.01 return for the DJIA and a 2% 0.02 return for the NCI. When the DJIA return is 1% and the NCI return is 2%, the a verage Company A stock return for all trading days is and the predicted Company A stock return for one specific trading day is This predicted return hasExplanation / Answer
The answer is First option namely “The estimated change I average company A stock return for a one-unit change in DJIA return, keeping the NCI return constant”.
The second answer is as follows:
When the DJIA return is 1% and NCI return is 2%, the average company A stock return for all trading days is estimated to be =0.0008+0.640*0.01+0.6869*0.02=0.020938, and the predicted company A stock return for one specific trading day is 0.020938. This predicted return has same as the average return.
The third answer is as follows:
When the DJIA return is 1% and the NCI return is 2% the 95% confidence interval for the average company A stock return is 0.26% to 3.93%. The 95% prediction intevral for the predicted company A stick return is -9.61% to 13.80%.
The interval for the average company A stock return is narrower than that for the predicted company A stock return, because you can estimated the average return for all trading days with higher precision than you can predict the return for one specific for one specific trading day.
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