Returns on common stocks in the United States and overseas appear to be growing

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 = 4.1 + 0.65 times U.S. RETURN (a) What is beta_0 in this line? beta_0 is the population intercept, 0.65. beta_0 is the population slope, 4.1. beta_0 is the population intercept, 4.1. beta_0 is the population slope, 0.65. 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 beta_1 in this line? beta_1 is the population slope, 4.1. beta_1 is the population slope, 0.65. beta_1 is the population intercept, 4.1. beta_1 is the population intercept, 0.65. 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. where y_i and x_i are observed overseas and U.S. returns in a given year, and epsilon_i are independent N(0, sigma) variables. What part of this model allows overseas returns to vary when U.S. returns remain the same? x_i epsilon_i sigma_i y_i

Explanation / Answer

a) Correct Answer: Option (C)

This says that the mean overseas return is 4.1

b) Correct Answer: Option (B)

the mean overseas return chages by 65%

c)

Yi = 4.1 + 0.65 * US retrun + eij

Correct Answer: option (B)

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