Professional Documents
Culture Documents
Q1 .
(a) Determine the prediction equation for the Intel stock excess returns when using
S&P 500 excess returns as only predictor.
Seen from the comment on matlab, we build a simple linear model. According to
the excess return of Intel, we make the scatterplot and add the trend line. And
the predicted equation of Intel is y = 1,574x + 0,001644, which is predicted by
only the return of S&P 500.
(b) What is the proportion of variation in Intel stock returns that can be explained by
the market?
The proportion of variation in Intel stock returns that can be explained by the
market which means that you need to determine how well the model fits the
data.
R-squared is a statistical measure of how close the data are to the fitted
regression line. It is also known as the coefficient of determination, or the
coefficient of multiple determinations for simple regression.
R-squared = Explained variation / Total variation
So the R^2 just represents the proportion, and seen from what matlab shows,
which is 0.456. It means that only 45.6 % of the variation in Intel stock returns
can be explained by the S&P 500 stock returns.
(c) Interpret the regression intercept (called alpha) and slope (called beta in
finance).
(d) The slope of a line, beta, measures how much the value of Intel return changes
for every so much that the value of S&P 500 return changes and it shows that
for every increase of 1 in x there is an increase of 1.574 in y. The intercept,
alpha, indicates that when x=0, y=0.001644.
(e) Are the intercept and slope significant? Explain.
To assess the significance of the intercept and slope, we can see the P-Value.
H0: Slope=0, no linear relationship exists.
Ha: Slope0, a linear relationship exists.
The P-Value of the intercept is 0.82549, which is much higher than 0.05, and it
means that there is no significant evidence to reject H0. So there is no
evidence to support that the intercept is significant.
The P-Value of the slope is 2.71E-17, which is far less than 0.05, and it means
that its significant evidence to reject H0. So there is strong evidence to prove
that the slope is significant.
(f) Predict the Intel excess return corresponding to an S&P 500 excess return of
-0.05 (5%).
As the equation is y = 1,574x + 0,001644, when S&P500 excess return is -0.05,
which means that x =
-0.05, then y = 1.574 * (-0.05) + 0.001644 = -0.077056. We conclude that the
Intel excess return corresponding to an S&P 500 excess return of -0.05 is
-0.077056.
Q2
(a) Provide the prediction equation for the ozone level when using a simple linear
regression with the temperature as predictor.
Q3
(c) Knowing that today the carbon dioxide level is 401, predict carbon dioxide level
in a month.
`z
The equation of prediction is y=0.99848x+0.74472
So then the carbon dioxide level is 401, predict carbon dioxide level
=0.99848*401+0.74472=401.1352.