Which of the following interpretations of the above regression output are incorrect? 1. The model explains 44.43% of the variation of Stock A II. The model cannot explain 80.26% of the variation of Stock A III. Stock A is less risky than average stocks in the market portfolio IV. Stock A is underpriced by 1.1% per annum
Which of the following interpretations of the above regression output are incorrect? 1. The model explains 44.43% of the variation of Stock A II. The model cannot explain 80.26% of the variation of Stock A III. Stock A is less risky than average stocks in the market portfolio IV. Stock A is underpriced by 1.1% per annum
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
1
Transcribed Image Text:The below excel output shows the regression results of monthly Stock A excess return on monthly S&P500
excess return:
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.4443
0.1974
0.1958
0.0622
486
Coefficients Standard Error 1 Stat
3.906
10.912
0.011
0.698
Intercept
S&P500
Which of the following interpretations of the above regression output are incorrect?
1. The model explains 44.43% of the variation of Stock A
0.003
0.064
P-value
0.000
0.000
O a. II and Ill
O b. I and IV
OC. II, III, and IV
Od. I and III
II. The model cannot explain 80.26% of the variation of Stock A
III. Stock A is less risky than average stocks in the market portfolio
IV. Stock A is underpriced by 1.1% per annum
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