An investment advisor is studying the relationship between a common stock’s price to earnings (P/E) ratio and factors that she thinks would influence it. She has the following data on the earnings per share (EPS) and the dividend percentage (Yield) for a sample of 20 stocks.

a. Develop a multiple linear regression with P/E as the dependent variable.

b. Are either of the two independent variables an effective predictor of P/E?

c. Interpret the regression coefficients.

d. Do any of these stocks look particularly undervalued?

e. Plot the residuals and check the normality assumption. Plot the fitted values against the residuals.

f. Does there appear to be any problems with homoscedasticity?
g. Develop a correlation matrix. Do any of the correlations indicate multicollinearity?

Transcribed Image Text:

Stock P/E EPS Yield Stock P/E EPS Yield 1 20.79 $2.46 1.42 11 1.35 $2.93 2.59 2 3.03 2.69 4.05 12 25.43 2.07 1.04 3 44.46 -0.28 4.16 13 22.14 2.19 3.52 4 41.72 -0.45 1.27 14 24.21 -0.83 1.56 5 18.96 1.60 3.39 15 30.91 2.29 2.23 6 18.42 2.32 3.86 16 35.79 1.64 3.36 7 34.82 0.81 4.56 17 18.99 3.07 1.98 8 30.43 2.13 1.62 18 30.21 1.71 3.07 9 29.97 2.22 5.10 19 32.88 0.35 2.21 10 10.86 1.44 1.17 20 15.19 5.02 3.50