Problem Set #2B
Due Oct. 6
NOTE: This is an individual homework assignment that each student must do on his/her own.
INSTRUCTIONS: In solving this problem, you do not need to do any computations by hand nor do hypothesis tests using test statistics and rejection rules. If there are questions of this type, answer them using appropriate software. Include the output and indicate from where, on the output, you obtain the answer. For any hypothesis test, finding and using the p-value is sufficient for computational purposes.
PROBLEM: Financial analysts are often concerned with how the volatility—that is, the change in price—of a stock depends on the volatility of the stock market in general. For example, consider the following variables pertaining to Amazon stock: AMZN = the fractional change in the price of Amazon stock on a day, MKT = the fractional change in the market on that same day.
The data file Amazon.xls contains 503 historical values of these two variables; thus, for example, the first value of 0.005193 for AMZN and −0.01003 for MKT means that, on that particular day, the price of Amazon stock increased by 0.5193% while that same day, the value of the market went down by 1.003%. Use the data in the file Amazon.xls and SPSS to run a regression model and then answer the following questions (use = 0.05 for all hypothesis tests). (35 points)
(a) Explain the meaning of the value of R2 in the context of this problem. (b) Is the value of R2 significant? Why or why not? Explain. (c) Would you use the model to forecast a value for AMZN? If so, provide a numerical example as an illustration. If not, explain why not? (Do not base your answer solely on the value of R2.)
(d) Interpret the correlation of AMZN and MKT in the context of this problem. (e) Use the slope to complete the following sentence: When the market increases (or decreases) by 1%, the price of Amazon stock is expected to … (f) Create and interpret a 90% conf. interval for the slope of...
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