Returns on common stocks in the United States and overseas appear to be growing
ID: 3181337 • Letter: R
Question
Returns on common stocks in the United States and overseas appear to be growing more closely correlated as economies become more interdependent. Suppose that the following population regression line connects the total annual returns (in percent) on two indexes of stock prices:
MEAN OVERSEAS RETURN = 4.4 + 0.68 × U.S. RETURN
(a) What is 0 in this line?
0 is the population intercept, 4.4.
0 is the population intercept, 0.68.
0 is the population slope, 4.4.
0 is the population slope, 0.68.
What does this number say about overseas returns when the U.S. market is flat (0% return)?
This says that the mean overseas return is ______ % when the U.S. return is 0%.
(b) What is 1 in this line?
1 is the population intercept, 4.4.
1 is the population intercept, 0.68.
1 is the population slope, 4.4.
1 is the population slope, 0.68.
What does this number say about the relationship between U.S. and overseas returns?
This says that when the U.S. return changes by 1%, the mean overseas return changes by _____ %.
(c) We know that overseas returns will vary in years having the same return on U.S. common stocks. Write the regression model based on the population regression line given above.
yi = ____ + ____ xi + i,
where yi and xi are observed overseas and U.S. returns in a given year, and i are independent N(0, ) variables.
Explanation / Answer
(a) What is 0 in this line?
Answer :0 is the population slope, 0.68.
(b) What is 1 in this line?
Answer : 1 is the population intercept, 4.4.
This says that when the U.S. return changes by 1%, the mean overseas return changes by 68%.
(c) We know that overseas returns will vary in years having the same return on U.S. common stocks. Write the regression model based on the population regression line given above.
yi = 4.4 + 0.68 xi + i
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