Regression

manish.g
Good Student
Posts: 10
Joined: Sun May 06, 2012 2:31 pm

Regression

Postby manish.g » Sun May 06, 2012 2:33 pm

Hi,
Can you pls explain below solution

You regress the returns of a global industrial company's stock against the returns for the MSCI EAFE index and determine the following information:

Rstock = 0.04 + 1.2X + e ;
scompany stock =6.6%,
sTMSCI EAFE = 4.8%,
covariance of returns = 0.002765.
The coefficient of determination for the regression equation is closest to:

Choose one answer. a. 0.873
b. 1.200
c. 0.762
d. 0.040

.The correct answer is 0.762

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Regression

Postby suresh.wadhwani2009 » Sun May 06, 2012 4:02 pm

Dear Manish,

Correlation = Covariance/Sigma(x)*Sigma(y)

So,

Correlation = 0.002765/0.066*0.048 = 0.8727

and we know that, Coeff of determination is square of correlation,

R^2=(0.8727)^2
R^2=0.762

Hope it helps :)

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Regression

Postby content.pristine » Mon May 07, 2012 11:10 am

Perfect! 8-)


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