Suppose that the stock valuation model in Exercise 11.2 is a quadratic equation E/P = 1:5+0:7R+0:005R 2
Question:
Suppose that the stock valuation model in Exercise 11.2 is a quadratic equation E/P = 1:5+0:7R+0:005R2.
a. What is the earnings/price ratio when the interest rate is 0?
b. What is the slope of the line at R = 0?
c. Does the slope of the line increase or decrease as R increases?
Exercise 11.2
The Fed’s stock valuation model says that the earnings/price ratio E/P is related to the interest rate R on 10-year Treasury bonds. Suppose that this relationship is described by the equation E/P = 1:2+0:8R.
a. What is the earnings/price ratio when the interest rate is 0?
b. How much does the earnings/price ratio increase when the interest rate increases by 1?
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a To find the earningsprice ratio EP when the interest rate is 0 we substitute ...View the full answer
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Related Book For 
Essential Statistics Regression And Econometrics
ISBN: 9780123822215
1st Edition
Authors: Gary Smith
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