13. The book-to-market ratio and the size of a company’s equity are two factors that have been asserted to be useful in explaining the cross-sectional variation in subsequent returns. Based on this assertion, you want to estimate the following regression model:

A. To what problem is your colleague referring, and what are its consequences for regression analysis?

B. With respect to multicollinearity, critique the choice of variables in the regression model above.
C. State the classic symptom of multicollinearity and comment on that basis whether multicollinearity appears to be present, given the additional fact that the F-test for the above regression is not significant.

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Book R = bo+bi + bSize; + & Market where R; = Return of company is shares (in the following period) Book Market); Size; company is book-to-market ratio Market value of company is equity A colleague suggests that this regression specification may be erroneous, because he believes that the book-to-market ratio may be strongly related to (correlated with) company size.