You are an investment analyst for Goldman & Sachs in New York and your supervisor asks you to run a regression model for 22 months of data on the excess returns on a fund manager's portfolio ("fund ABC") and the excess returns on a market index. You suggest him a model of the following form:

Where

=++

= =

is the return on fund ABC,is the risk-free rate andis the return on the market index.

Assume you have calculated the following data for the variablesand, = 7 2 4 , 3 3 6 ,= 2 2 ,= 4 2 3 . 6 3 ,= 8 3 . 3 3 ,

2

= 4,850,124,= 123.4,

=( ) = 2 5 5 . 5 .

2

(a)Compute the estimatedvalues of and and interpret these values.

(b)Compute the estimated standard errors of and .

(c)Write down the estimated model with standard errors.

(d)Construct a 95% confidence interval for the slope coefficient. Interpret this confidence

interval.(3 marks)(e)The fund manager wants to predict the risk premium for the ABC fund for next year. He

believes that next year the market risk premium would be 10% (use 10 instead of 0.1).

Predict the risk premium for the ABC fund using your answer in (a).(f)Compute the value of R2. Interpret this value.

(3 marks) (3 marks)