18. The table shown below shows the results of Google\'s returns regressed on th

Question

18. The table shown below shows the results of Google's returns regressed on the S&P500 index and the broad market index. The table also shows a regression on the FF 3-factor model. a. Interpret the data and provide at least five observations. Monthly returns Jan 2006-Dec 20 10 Single Index specification Broad FF3-factor 61Breed mkt index 0.70 Estimate Correlation coeff Adj R-square Residual SD-Regression SE Alpha-intercept Market beta SMB beta HML beta 0.59 0.34 8.46 0.88 120 047 761 0.62 151 O.20) (133) 0.36 8.33 0.64 116 Note: SMB size HML book to market

Explanation / Answer

Observations from above data:

1. Correlation coefficient is positive and increasing from S&P 500 to Fema French 3 factor model, which shows that there is positive correlation between Google stock and index.

2. Adjusted R square is very low in case of S&P500 but it reached alomost .5 incase of FF 3 factor model which tells that FF 3 factor model is able to provide more information about Google stock.

3. Alpha is keep decreasing from the teh S&P500 to FF 3 factor model which tells that the factors are able to provide more information that leads to reduction in alpha value.

4. Small minus big beta is negative which tells that the Google is big company and generating more return than small company.

5. highe book value minum low book value beta negative signifies that google has higher expected returns if low book-to-market (i.e., growth) stock outperform high book-to-market (i.e., value) stock, suggesting that the google is growth stock

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