F IL E A research analyst is trying to determ ine w hether a firm's price-earnings (P/E) and price-sales (P/S) ratios can explain the firm's stock performance over the past year.

Generally, a high P/E ratio suggests th a t investors are expecting higher earnings grow th in the future compared to companies w ith a low er P/E ratio. Investors use the P/S ratio to determ ine how m uch they are paying for a dollar of the firm's sales rather than a dollar o f its earnings (P/E ratio).

In short, the higher the P/E ratio and the lower the P/S ratio, the more attractive the investm ent. The table below shows the 2010 annual returns, the P/E ratios, and the P/S ratios fo r a portion o f the 30 firm s included in the Dow Jones Industrial Average. The com plete data set can be found on the text website, labeled D o w 2010.

DOW Components Return (in %) P/E ratio P/S ratio 3M Co. 4.4 14.37 2.41 Alcoa Inc. − 4.5 11.01 0.78 Walt Disney Company 16.3 13.94 1.94 SOURCE: T h e 2 0 1 0 re tu rn s (J a n u a ry 1 , 2 0 1 0 – D e c e m b e r 3 1 , 2 0 1 0 ) w e r e o b ta in e d fr o m The W a ll S tre e t J o u rn a l, J a n u a ry 3 , 2 0 1 1 ; th e P /E ra tio s a n d th e P /S ra tio s w e re o b ta in e d fr o m fin a n c e .y a h o o .c o m o n J a n u a ry 2 0 , 2 0 1 1 .

a. Estimate Return = β0 + β1 P/E + β 2 P/S + ε . Show the regression results in a w ell-form atted table.

b. Determ ine w hether P/E and P/S are jo in tly significant at the 5% significance level.

c. Establish w hether the explanatory variables are individually significant at the 5% significance level.

d. W hat is the predicted return for a firm w ith a P/E ratio of 10 and a P/S ratio o f 2? Use this value to construct a 95%

confidence interval for the expected return.