As the manager of the trading desk at an investment management firm, you have noticed that the average bid-ask spreads of different Nasdaq-listed stocks can vary widely. You have formulated the hypothesis that Nasdaq stocks' percentage bid-ask spreads are related to the number of market makers and the company's stock market capitalization. You have decided to investigate your hypothesis using multiple regression analysis. You specify a regression model in which the dependent variable measures the percentage bid-ask spread and the independent variables measure the number of market makers and the company's stock market capitalization. The regression is estimated using data for 1,819 Nasdaq-listed stocks. Based on earlier published research exploring bid-ask spreads, you express the dependent and independent variables as natural logarithms, a so-called log-log regression model. A log-log regression model may be appropriate when one believes that proportional changes in the dependent variable bear a constant relationship to proportional changes in the independent variable(s). You formulate the multiple regression: Yi =b0 +b1X1i +b2X2i +i where:

Yi = the natural logarithm of (bid-ask spread/stock price) for stock i X1i = the natural logarithm of the number of Nasdaq market makers for stock i X2i = the natural logarithm of the market capitalization (measured in millions of dollars) of company i

A.) How much do you expect bid-ask spread/stock price to increase or decrease by?

B.) You suspect that the greater the number of market makers, the smaller the percentage bid-ask spread.

Formulate a null hypothesis and alternative hypothesis at a .01 significance level?

C.) You also believe that the stocks of companies with higher market capitalization may have more-liquid markets,

tending to lower percentage bid-ask spreads. Formulate a null hypothesis and alternative hypothesis at a .01

significance level?

D.) Explain the overall significance of the regression?

E.) What is the predicted bid-ask spread as a percent of the stock price?