1 For the years 1961–1970, the annual return on General Motors stock and the return on the Standard and Poor’s market index were as given in Table 20 (file Beta.xls).

a Let Y return on General Motors stock during a year and X return on Standard and Poor’s index during a year. Financial theory suggests that Y b0

b1X , where b1 is called the beta for General Motors.

Give an interpretation for the beta of a stock (in this case, General Motors), and use the data in Table 20 to estimate the beta for General Motors.

b Does the Standard and Poor’s index appear to have a significant effect (for a 0.05) on the return on General Motors stock?

c What percentage of the variation in the return on General Motors Stock is explained by variation in the Standard and Poor’s index?

d What percentage of the variation in the return on General Motors stock is unexplained by variation in Standard and Poor’s index?

e During a year in which the Standard and Poor’s in

dex increased by 15%, what would we predict for the return on General Motors stock?

Transcribed Image Text:

TABLE 20 Return on General Return on Standard Motors and Poor's Year Stock Index 1961 12% 21% 1962 2% -3% 1963 38% 15% 1964 26% 20% 1965 18% 12% 1966 -10% 0% 1967 0% 10% 1968 9% 10% 1969 -2% 2% 1970 -1% -15%