Q2. Estimating Beta for Bayer AG Bayer AG is a chemicals conglomerate focused on crop science and health care. The company's stock trades on the Xetra Brse Frankfurt in Germany. Suppose you are an investor in Bayer's stock and want an estimate of its beta. As in the text example, you hypothesize that Bayer has an average level of market risk and that its required return in excess of the risk-free rate is the same as the market's required excess return. One regression that summarizes these statements is (R-R) =a +B(Ra-R) + where RF is the periodic risk-free rate of return (known at the beginning of the period), RM is the periodic return on the market, R is the periodic return to the stock of the company, and B measures the sensitivity of the required excess return to the excess return to the market. Estimating this equation with linear regression provides an estimate of B, which tells us the size of the required return premium for the security, given expectations about market returns. Suppose we want to test the null hypothesis, Ha, that B = 1 for Bayer stock to see whether the stock has the same required return premium as the market as a whole. We need data on returns to Bayer stock, a risk-free interest rate, and the returns to the market index. For this example, we use data from October 2014 through October 2019 (n = 60). The return to Bayer stock is R. The monthly return to 10-year German government bonds is RF. The return to the DAX Index is Rm. This index is the primary broad measure of the German equity market. We are estimating two parameters, so the number of degrees of freedom is n-2 = 60 - 2 = 58. The following table shows the results from the regression (R-RA) =a +B(RM-R-) +E. Regression statistics Multiple R R? Standard error of estimate Observations 0.7552 0.5703 0.0547 60 Coefficients -0.00962 1.1275 Alpha Beta Standard error 0.0073 0.1285 t-statistic -1.3161 8.7747 Q2.1 Test the null hypothesis, Ho, that B for Bayer equals 1 (= 1) against the alternative hypothesis that does not equal 1 (+1) using the confidence interval approach. Q2.2 Test the above null hypothesis using a t-test. Q2.3 How much of Bayer stock's excess return variation can be attributed to company- specific risk? Important note: Note: The t-statistics for a coefficient automatically reported by statistical software programs assume that the null hypothesis states that the coefficient is equal to 0