Question
he following model of the annual return on a stock is to be estimated:=0+1+2+3+4+(1)where is the percentage annual return for the stock, is the size
he following model of the annual return on a stock is to be estimated:=0+1+2+3+4+(1)where is the percentage annual return for the stock, is the size of the firm of form measured in terms of sales revenue, is the market to book ratio of the firm, is the price/earnings (/)ratio of the firm and is the stocks CAPM coefficient. The above model was then estimated using cross-sectional data with 200 firms (with standard errors in parentheses):=0.080+0.801+0.321+0.164+0.084(2)(0.064)(0.147)(0.136)(0.420)(0.120)2=0.42,Adjusted2=0.52,=200Note: Word limit for question 3b: 600 words
(i)Explain what the 2coefficientdescribes and interpret the 2.(ii)Interpret the coefficients (excluding the constant) in the above model. Are the signs of the coefficients consistent with your expectations? Why or why not? (iii)Using a t-test and a 1% level of statistical significance, are the individual estimated coefficients, other than the constant term, each statistically significantly different from zero?[15marks](iv)Using a t-test, does the coefficient 1equal 1?(v)Calculate a 99% confidence interval for the effect of size of the firm on stock return in equation (2). (vi)In relation to the estimated effects of each variable, discuss the meaning of statistical significance and the meaning of economic significance. Which variable(s) is most important for the determination of stock return
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