Question 1

After obtaining the monthly share prices for Tesco and FTSE all index values for the last five years, you run an ordinary least square regression between the monthly returns on Tesco and the returns on FTSE All index. You obtain the following regression outputs on Excel.

Regression Statistics
Multiple R	0.354797921
R Square	0.125881565
Adjusted R Square	0.110546154
Standard Error	0.070047679
Observations	59

ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.040276731	0.040276731	8.208554927	0.005828653
Residual	57	0.27968061	0.004906677
Total	58	0.319957341

	Coefficients	Standard Error	t Stat	P-value
Intercept	-0.01085817	0.009165034	-1.184738563	0.241037201
X Variable 1	0.920882401	0.321418462	2.865057578	0.005828653

Required

(a) (i) What is the estimated beta value for Tesco from the above regression outputs?

(3 marks)

(ii) Identify the specific estimation errors relating to a regression approach as the above. (6 marks)

(iii) How could we improve the estimation accuracy? (3 marks)

(b) (i) Explain what the R square in the above Excel outputs measures. (3 marks)

(ii) Does it cast doubt about the validity of the Capital Assets pricing Model (CAPM)? Clearly explain your reasoning. (no more than 500 words) (10 marks)