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You are analyzing whether the difference in returns on stocks of a particular country can be explained by two common factors, with a linear-factor model.
You are analyzing whether the difference in returns on stocks of a particular country can be explained by two common factors, | |||||||||||||||||||||||
with a linear-factor model. Your candidates for the tow factors are changes in interest rates and changes in the approval rating | |||||||||||||||||||||||
of the country's president, as measured by polls. The following table gives the interest rate, the percentage of people approving | |||||||||||||||||||||||
the president's performance, and the prices of three stocks (A, B and C) for the past 10 period. | |||||||||||||||||||||||
Price of Stock | |||||||||||||||||||||||
Period | Interest rate % | Approval % | A | B | C | ||||||||||||||||||
1 | 7.3 | 47 | 22.57 | 24.43 | 25.02 | ||||||||||||||||||
2 | 5.2 | 52 | 19.9 | 12.53 | 13.81 | ||||||||||||||||||
3 | 5.5 | 51 | 15.46 | 17.42 | 19.71 | ||||||||||||||||||
4 | 7.2 | 49 | 21.62 | 24.7 | 23.24 | ||||||||||||||||||
5 | 5.4 | 68 | 14.51 | 16.43 | 18.79 | ||||||||||||||||||
6 | 5.2 | 49 | 12.16 | 11.56 | 14.66 | ||||||||||||||||||
7 | 7.5 | 72 | 25.54 | 24.73 | 28.68 | ||||||||||||||||||
8 | 7.6 | 45 | 25.83 | 28.12 | 21.47 | ||||||||||||||||||
9 | 5.3 | 47 | 13.04 | 14.71 | 16.43 | ||||||||||||||||||
10 | 5.1 | 67 | 11.18 | 12.44 | 12.5 | ||||||||||||||||||
Try to assess whether the two factors have an influence on stock returns. To do so, estimate the factor exposures for each of the three | |||||||||||||||||||||||
stocks by doing a time-series regression for the return on each stock against the changes in the two factors. Ri= ai +b1if1+b2if2+ei
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