(1) The secu urity characteristic line of modern investment anal sis involves ru
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(1) The secu urity characteristic line of modern investment anal sis involves running the following where r = the rate of return on a stock or security Tm - the rate of return on the market portfolio represented by a broad market index such as S&P500;, and t = time In investment analysis, B2 is known as the beta coefficient of the security and is used as a measure of market risk, that is, how developments in the market affect the fortunes of a given company Based on 240 monthly rates of return for the period 1956 to 1976, Fogler and Ganapathy obtained the following results for IBM stock. The market index used by the authors is the market portfolio index developed at the University of Chicago: = 0.7264 + 1.0598mt se (0.3001) (0.0728) r0.4710 a. Interpret the estimated intercept, slope and r A security whose beta coefficient is greater than 1 is called a volatile or aggressive security. Set up the appropriate null and alternative hypotheses. Which test do you use, one-tailed or two-tailed, and why? b.Explanation / Answer
a. The estimated slope coefficient shows how much the rate of return of the stock changes as the stock market return changes. So a 1 unit change in the stock market return changes the stock return by 1.0598. The intercept term shows the value of the stock return when the stock market index is 0. The R squared shows the proportion of the stock return that is explained by the stock market index. This 47% of the change in the dependent variable will be brought about by the independent variable.
b. Here we set up the null hypothesis that the beta coefficient is =1. The alternative hypothesis should be that the beta coefficient >1. We use a one tail a right tailed test as the question is whether the beta coefficient only >1 and not both ways.
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