1.

Interest rate and Stock Market Indices:

Understanding how changes in the market are related to changes in interest rates we can take a look at the regression analysis, the relationship between a dependent (y) and independent (x) variables, from our statistical data in Table 1.0 and Table 1.0b in the Appendix. The graph indicates that there is a negative correlation between the interest rates and market indices. As interest rates increase by 1% the stock market indices go down by 33.5% and vice versa. o Additionally, P-Value is less than the significance level, .0277<.05 which means that we can reject the null hypothesis. o By interpreting this information we can observe that the interest rates do affect the changes in stock market indices. Variable r: The multiple r represents the value of the linear correlation coefficient for the sample data (Triola 520). The significance of the relationship between changes in the two variables, stock market indices and interest rate, is approximately 0.51788 percent. Since the value of r=.5177 exceeds 46.8% for n=18 Trials, shows us once again that there is a linear correlation between the two values.

Variable r: The value of r is the proportion of the variation in y that is explained by the linear relationship between x and y (Triola 524). r=.2686 About 26.86% of the time the changes in interest rate can be explained by changes in the stock market indices. This implies that 73.14% of the time the changes in interest rates cannot be explained by the stock market indices. Thus, interest rates are not the only variables affecting stock market price. Considering only the interest rates would be a mistake. Outlier: The data shows that there is an outlier, a statistical observation that is markedly different in value from the others of the sample (Merriam). In this case the outlier in the sample data is Japan. Refer to Table 1.1 and the Table 1.1b in the Appendix for the data analysis without Japan. Since the variable r is very sensitive to outliers the existence of Japan needs to be taken into consideration. The data in Table 1.1 shows a negative relationship between interest rates and Stock market indices. As interest rate increases by 1% stock market indices fall by 38.34% and vice versa. Data excluding Japan: 2

The new data, without Japan, contradicts our original finding due to the sensitivity of variable r to outliers.

Variable r: Variable r is equal to 34.79%: The value of r without Japan, 34.79%, is lower than the value of r with japan 51.77%. Since 34.79% is less than 48.6%, we conclude that there is no linear correlation between interest rates and stock market indices. Therefore, other variables that can explain the changes in the stock market indices must be considered. Variable r: When Japan is excluded from the data, the variable r indicates that 12.15% of the time. Changes in the interest rate can be explained by the changes in stock market indices as compared to the 26.86% when Japan was included in the data. P-Value: The p-value indicates that we fail to reject the null hypothesis because its value, 0.1712, is greater than the significance level of 0.05. Although we fail to reject the null hypothesis, given the r of 12.15%, we must consider other variable in order to make an informed decision about which country is fit to invest in. 3

 We can conclude that a relationship does not exist between interest rates and stock market indices because we fail to reject the null hypothesis.

2. Inflation rate and Stock Market Indices:

Regression Analysis: The regression analysis was performed; Table 1.2, to verify if a correlation exists between the variables. The analysis shows inflation as the independent variable and the stock market indices is the dependent variable. Analysis also shows a small correlation between inflation and stock market indices. P-Value: The P-Value, given the significance level, tells us weather to accept or reject our null hypothesis, which assumes that there is no correlation between inflation and stock market indices. However, when analyzing the data we find that: The p-value is equal to .0397 given the significance level of .05. The p-Value is less than the significance level, .0397<.05, therefore a correlation exists between inflation and market indices.

Variable r: Variable r shows the extent of the correlation between inflation and market indices. The variable r was found to be .48852, signifying an approximate 49% correlation between inflation and stock market indices. Variable r: Variable r tells us what percent of the changes in the stock market indices can be explained by the changes in the inflation rate. Variable r was found to be .2387 about 23.87% of a countrys change in stock can be explained by the changes in the inflation rates. The scatter plot in Table 1.2b shows this relationship. Foreign and Domestic Investment. An investor should consider several variables when comparing foreign and domestic investment for example, government stability. There is a very high risk in trading with a government that is unstable; therefore trading with a more stable government would reduce this risk. Foreign investment is defined as, Flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets (ULC). o Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment (ULC). o Foreign investment typically works both ways, especially between countries of relatively equal economic stature (ULC).

 Domestic Investment is defined as, Expenditures on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period, after deducting capital depreciation (Ecomonic Glossary). o More specifically net private domestic investment is found by subtracting the capital consumption adjustment from gross private domestic investment (Ecomonic Glossary). o Its primary function is to measure the net increase in the capital stock resulting from investment (Ecomonic Glossary).

Variables contributing to government stability: Factors that contribute to government stability that an investor should consider are property rights, corruption, and size of the Labor Force, Natural Capital and technology. For these are good determinants of the wellbeing of a countries economy. Property rights: o A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government, collective bodies, or by individuals. All economic goods have a property rights attribute. This attribute has four broad components: the right to use the good the right to earn income from the good the right to transfer the good to others the right to enforcement of property rights (Wikipedia). 6

o Property rights allow individuals to open new business and invent new products and ideas. If a government is unstable one would be in fear of losing their physical and intellectual property and would not strive to open new businesses, thus the economy would not grow. Corruption: o Corruption is inducement to wrong by improper or unlawful means (as bribery) (Merriam). o Corruption in governments can heavily increase the risks of investment due to the lack of legal support. The investor risks losing the gains on investment because corrupt governments can fabricate laws and regulations to their own benefit. Size of the Labor Force: o Labor force is the subset of [people] who have jobs or are seeking a job, are at least 16 years old, are not serving in the military and are not institutionalized. In other words, [People] who are eligible to work in the everyday economy (ULC). o The size of the labor force determines the final output of goods and services. The larger the Labor Force the more goods and services can be produced, thus causing a growth in real Gross Domestic Income. Gross Domestic Income (GDI) - The sum of all income earned while producing goods and services within a nation's borders (ULC). GDI = compensation of employees + gross operating surplus + gross mixed income + taxes subsidies on production and imports (ULC). o As people get educated in school or for job training they are, in turn, increasing real output.

 Natural Capital: o Natural Capital is the stock of natural resources, such as water and oil. Unlike other forms of equity (such as machines and buildings), which can be created on a regular basis, many natural resources are nonrenewable. Natural capital includes many resources that humans and other animals depend on to live and function (ULC). o A country that is rich in Natural Capital can produce more goods and services for trade and for its own economic growth. For example, countries that are rich in oil reserves have a healthier economy then countries without this natural resource. Technology Sector: o The technology sector is a category of stocks relating to the research, development and/or distribution of technologically based goods and services. This sector contains businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology (ULC). o As technology improves development of goods and services becomes easier and more final goods can be produced by the Labor Force. o Businesses benefit from technology because improved technology allows business to make better strategic decisions which allows investors to gain returns on their investments and reduce risks of capital loss. Although there are other variables to evaluate when considering foreign versus domestic investments, the variables mentioned above can be a good measure of a countries ability to

generate investment returns.

RECOMMENDATIONS As we consider all of our findings, we recommend as follows: A larger sample size should be used in the statistical data, because a larger size decreases the margin of error when analyzing the data. Stock market indices should be compared to other macroeconomic variables such as human capital, unemployment, consumer price indices (CPI). Analyzing benchmark data such as interest rates, should be compared relatively to the size and the economy of the country, a 5% interest rate change in one country may not be as significant in another country and therefore is not necessarily a negative indicator. CONCLUSION The statistical and economic data has provided us with the evidence need to make a final recommendation for International Investments, Inc., we have determined that global investments is a good fit for its clients and therefore, would be logical to continue providing financial services to international markets. APPENDIX Table 1.0

SUMMARY OUTPUT Regression Statistics Multiple R 0.51771404 R Square 0.26802783 Adjusted R Square 0.22227956 Standard Error 12.8397488 Observations n=18 ANOVA df Regression Residual Total F-test SS MS F Significance F 1 965.869267 965.869267 5.85875442 0.027762596 k 16 2637.74638 164.859149 n-k-1 17 3603.61565 n-1

sum of squares due to regression sum of squares due to residual sum of squares total

CoefficientsStandard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 33.391127 3.25632937 10.2542228 1.9349E-08 26.48801706 40.2942368 26.4880171 40.2942368 % Change in Interest Rates -0.0299402 0.01236952 -2.4204864 0.0277626 -0.056162454 -0.003718 -0.0561625 -0.003718

y=33.3911-.02994x

Table 1.0b
70.00 60.00 % Change in Market Indicies 50.00 40.00 30.00 20.00 10.00 0.00 -200.00 0.00 200.00 400.00 600.00 800.00 1000.00 1200.00 % Change in Interest Rates y = -0.0299x + 33.393 R = 0.2682

Table 1.1. 10

Regression Statistics Multiple R 0.347925013 R Square 0.121051815 Adjusted R Square 0.062455269 Standard Error 12.68295855 Observations 17 ANOVA df Regression Residual Total 1 15 16 SS MS F Significance F 332.3077247 332.3077 2.0658524 0.171163138 2412.861564 160.8574 2745.169288

Intercept X Variable 1

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 38.34843502 5.29330656 7.244703 2.856E-06 27.06601916 49.6308509 27.06601916 49.63085088 -0.162092857 0.112775362 -1.43731 0.1711631 -0.402467852 0.07828214 -0.40246785 0.078282138

Table 1.1b

70.00 60.00

% Change in Market Indicies

50.00 40.00 30.00 20.00 10.00 0.00 y = -0.1621x + 38.348 R = 0.1211

-40.00

-20.00

0.00

20.00 40.00 % Change in Interest Rates

60.00

80.00

100.00

Table 1.2 (Inflation vs Market Indicies Regression summary, with Indonesia)

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SUMMARY OUTPUT Regression Statistics Multiple R 0.488518893 R Square 0.238650709 Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total 1 16 17 SS MS F Significance F 0.039679003 0.191066378 13.09301651 18

859.7618973 859.7618973 5.015321326 2742.833303 171.4270814 3602.5952 t Stat P-value

Coefficients Standard Error Intercept X Variable 1 23.0353887 2.543890006 1.135923143

Lower 95%

Upper 95%

Lower 95.0% Upper 95.0%

4.536982514 5.077248729 0.000112025 2.23949131 0.039679003

13.41741543 32.65336198 13.41741543 32.65336198 0.135840517 4.951939496 0.135840517 4.951939496

Table 1.2b (Scatter Plot)

70

60 % change in Stock Market Indices

50

40

30 y = 2.5439x + 23.035 R = 0.2387 20

10

0 0 2 4 6 8 10 12 14 Inflation Rate 2006

Table 1.3 (Inflation vs Market Indicies Regression summary, Without Indonesia) 12

SUMMARY OUTPUT Regression Statistics Multiple R 0.007406746 R Square 5.48599E-05 Adjusted R Square -0.06660815 Standard Error 13.03513835 Observations 17 ANOVA df Regression Residual Total 1 15 16 SS MS F Significance F 0.1398303 0.1398303 0.000822943 0.977492429 2548.722476 169.9148317 2548.862306 Lower 95% Upper 95% Lower 95.0% Upper 95.0% 13.80096684 43.81527375 13.80096684 43.81527375 -5.833950615 5.678998845 -5.833950615 5.678998845

Intercept X Variable 1

Coefficients Standard Error t Stat P-value 28.8081203 7.040820407 4.091585729 0.000962541 -0.07747589 2.700732345 -0.02868699 0.977492429

Table 1.3b (Inflation vs Market Indicies, Scatter Plot)

50 45 40 % Change in Stock Market Indices 35 30 25 20 15 10 5 0 0 1 2 3 4 5 Inflation Rate 2006

y = -0.0775x + 28.808 R = 5E-05

13