Question 3

Consider the daily percent changes of Company ABC stock price and those of the Company
XYZ Industrial Average for trading days in the months of May and September 1999, as shown in
the Excel file.
a. Draw a scatter plot of Company ABCs daily percent changes against the Company XYZ
percent changes.
4.00
3.00
2.00
f(x) = 1.19x - 0.09
R = 0.44

1.00

Company XYZ

0.00
-2.00
-1.00

-1.00

0.00

1.00

2.00

-2.00
-3.00

Company ABC

b. Describe the relationship you see in this scatter plot.

There is positive weak relationship between Company ABCs daily percent changes and the
Company XYZ percent changes.
c. Find the correlation between these percent changes. Does this agree with your impression
of the scatterplot?
The coefficient of correlation is 0.664. The coefficient of correlation confirm the impression
provided by the scatterplot. There is a positive but weak relationship between Company
ABCs daily percent changes and the Company XYZ percent changes.
d. Find the coefficient of determination. What this tells you?

s 2x =

1
n1

1
s y=
n1
2

[
[

x 2i

( x i )
i =1

i=1

( y i)

y
i=1

2
i

]
]

i =1

1
101.60
85.75
=0.02483.3=1.99
421
42

1
135.26
29.26
=0.02426.04=0.64
421
42

1
s xy =
n1

i=1

i=1

xi yi

i=1

x i y i

1
11.6310.08
33.73
=0.02430.94=0.74
421
42

s2xy
(0.74 )2
0.55
R = 2 2=
=
=0.43
s x s y 1.990.64 1.27
2

The coefficient of determination of 0.43 indicates that 43% of the daily percent changes of
Company ABC stock price are due the changes in the stock prices of Company XYZ. The
remaining 57% is unexplained.
e. Find the regression equation to predict the percent change in Company ABCs stock from
the percent change in the Company XYZ Index.
^y =b 0+ b1 x
s 2x =1.99

s xy =0.74

xi

10.08
x = i=1 =
=0.24
n
42
b1 =

s xy
2

yi

11.63
y = i=1 =
=0.28
n
42

0.74
=0.37
1.99

b0 = y b 1 x =0.28( 0.37 ) ( 0.27 ) =0.18

^y =b 0+ b1 x
^y =0.18+ 0.37 x
f. Find the 95% confidence interval for the slope coefficient.
1=b1 t s b

Degree of freedom is 42 2 = 40
sb =
1

(n1) s

2
x

0.096
=0.010
( 421 ) 1.99

 1=b1 t s b =0.37 ( 2.77 )( 0.010 )

1

Lower 95% = 0.34 /

Upper 95% = 0.40

With 95% confidence, the slop of the regression line is a number lower than 0.40 and higher than
0.34.
g. Test at the 5% level to see whether or not the daily percent changes of Company ABC
and of Company XYZs Index have a linear relation.
H 0 : 1=0
H 1: 1 0
t /2 =t 0. 05/2 =t 0.025=2.7 7
Degree of freedom is 42 2 = 40
s =

SSE
n2

s2xy

2
y

SSE=( n1 ) s

s2x

=( 421 ) 0.64

( 0.74 )2
1.99

= 41 * ( 0.640.28 )

410.36=14.76
s =

sb =
1

SSE
n2
s

(n1) s

t stat =

2
x

14.76
=0.096
40

0.096
=0.010
( 421 ) 1.99

b 1 1 0.370
=
=37
sb
0.010
1

Rejection
region

Rejection
region
t stat=37

2.77

+2.77

t stat

falls in the rejection region. We dont evidence to support

H 0 . There is a linear

relation relationship between Company ABCs daily percent changes and the Company XYZ
daily percent changes.

h. Run the LINEST function in Excel. Provide the result table.

b1
Sb1
R2
Fstat
SSR

1.188
0.211
0.441
31.557
36.751

-0.089
0.177
1.079
40
46.584

bo
Sb0
S
n-2
SSE