One of several simple linear regressions run to assess firms’ stock performance based on the Capital Asset Pricing Model (CAPM) for firms with high ratios of cash flow to stock price was the following.
Firm excess return = 0.95 + 0.92 Market excess return + Error
The standard error of the slope estimate was 0.01 and the sample size was 600 (50 years of monthly observations).
a. Is this regression relationship statistically significant?
b. If the market excess return is 1%, predict the excess return for a firm’s stock.