George believes that the returns of mutual funds are influenced by annual turnover rates and annual expense ratios. In order to substantiate his claim, he randomly selects 20 mutual funds and collects data on each fund’s five-year annual return (Return), its annual holding turnover rate (Turnover), and its annual expense ratio (Expense). All variables are measured in percentages. A portion of the data is shown in the accompanying table.

a. Estimate: Return = β₀ + β₁ Turnover + β₂ Expense + ϵ. Conduct appropriate tests to verify George’s theory at the 5% significance level.

b. Discuss the potential problems of multicollinearity and changing variability.

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Turnover Return Expense -7.32 First Eagle Gold A 16 1.27 Dodge&Cox Int'l 10.14 17 0.64 Brandes Int'l Equity 8.94 1.18 18