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 (S 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-9686-783R eturn a)Interpret the intercept in the linear model. Choose the correct answer below. O A. The intercept is the predicted value of the Return if the money Flow was S0. O B. The intercept is the predicted value of the money Flow if the Return was 0%. ° C. The intercept is the actual value of the money Flow if the Return was 096. O D. The intercept is the actual value of the Return if the money Flow was $0. b)Interpret the slope in the linear model. Choose the correct answer below. A. O B. Money Flow increases by $783 million for every 1% increase in fund Return. Money Flow increases by $783 million for every 1 % decrease in fund Return. Fund Return increases by S783 million for every 1% increase in money Flow. C. O D. Fund Return increases by S783 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 $ d)If during this month, the recorded fund Flow was $5 billion, what is the residual using this linear model? Did the model provide an underestimate or million. overestimate for this month? The residual is million dollars. The model provided an (1) for this month. 1) overestimate O underestimate

Explanation / Answer

a) The intercept is the predicted value of the money flow in case the return is 0%. because when we put Return = 0 in the equation, we get Flow predicted value as 9686

Therefore B is the correct answer here.

b) Now as the slope is positive and has a magnitude of 783, therefore for each unit percentage increase in the return, there would be an increase in 1 million dollars in flow.

Therefore A is the correct answer here.

c) The predicted fund flow for return = 0% is $9686 million ( as we saw in part a) above

d) The residual value is computed as:

r = observed value - Predicted value = 5000 - 9686 = -4686

Therefore the residual value here would be -4686 million dollars.

Therefore the model provides an overestimate for this month.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.