Description

Answer the following questions:
1. Calculate the market returns by taking the weighted average of columns 3 to 5, with weights
0.3, 0.4 and 0.3.
(a) Plot the market return series (plot(x,type=’l’) will do).
(b) Comment on the features you see in the figure
2. Use the data from 1965.01 to 1969.12 (rows 463:522) only to fit a simple linear regression usingColumn 11 (the small company portfolio) as the response variable and the market return you obtained in (1) as explanatory variable. Answer the following questions:
(a) Draw a scatter plot and add the estimated regression line to the plot.
(b) What is the standard error of b1 for estimating β1?
(c) Obtain a 95% confidence interval for b1. What does a confidence interval mean in general?
(d) What is the p-value for testing H0 : β0 = 0 vs H1 : β0 6= 0? What is your conclusion? (e) What is the p-value for testing H0 : β1 = 0 vs H1 : β1 6= 0? What is your conclusion?
(f) Perform a 5% level test for testing H0 : β1 = 1 vs H1 : β1 6= 1? What is your conclusion?
(g) Obtain the R2 of this linear regression model. What does it mean? Comment on it.
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