Question 1

You are an investment analyst, and your task is to assess the relationship between risk and yields for various investment funds. You have compiled data on returns and riskiness of 30 large investment funds, using 5-year averages for returns (after fees) and risk (measured by standard deviations of the returns).

Investment Fund	Return (5years Avarage)	St Dev(5year Average)
1	0.31%	5.68%
2	0.52%	4.72%
3	1.94%	2.88%
4	0.84%	2.97%
6	1.19%	5.53%
7	0.98%	8.04%
8	2.36%	11.57%
9	2.09%	10.81%
10	2.60%	11.80%
11	2.50%	10.98%
12	2.99%	12.44%
13	3.16%	15.42%
14	3.55%	12.56%
15	3.55%	17.09%
16	3.05%	17.47%
17	3.02%	16.16%
18	4.24%	18.44%
19	2.87%	18.70%
20	4.99%	21.04%
21	5.28%	16.89%
22	4.71%	21.04%
23	5.87%	23.08%
24	5.33%	24.17%
25	5.21%	23.73%
26	6.55%	26.04%
27	5.66%	23.08%
28	6.48%	25.08%
29	5.76%	25.51%
30	6.96%	27.85%

Compute the least squares regression equation, using return as the dependent variable and standard deviation as the independent variable. Interpret the results. (5 marks)

Use the 95% confidence level to show where we should expect the relationship to stand at this level of certainty.

(5 marks)

Which fund did the best compared with the expected (predicted) result? Which one did the worst? Use residuals of the regression in

your answer.