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Question 1: The managing partner of an advertising agency believes that his company's

sales are related to the industry sales. He uses Microsoft Excel's Data Analysis tool to
analyze the last 4 years of quarterly data (i.e., n = 16) with the following results:

Regression Statistics
Multiple R 0.802
R Square 0.643
Adjusted R Square 0.618
Standard Error SYX 0.9224
Observations 16

ANOVA
df SS MS F Sig.F
Regression 1 21.497 21.497 25.27 0.000
Error 14 11.912 0.851
Total 15 33.409

Predictor Coef StdError t Stat P-value


Intercept 3.962 1.440 2.75 0.016
Industry 0.040451 0.008048 5.03 0.000

Durbin-Watson Statistic 1.59

a) What is the value of the quantity that the least squares regression line minimizes?
Explain your answer.

In the least squares regression line minimizes the sum of the squares of the deviations
from the actual values to its predicted values. The minimized the sums of the squares of
these errors to the value zero. If the sum of the squares of these values zero, the line of
regression is best fit to the given data.
In otherwords, the difference between the actual value and predicted values becomes
zero.

b) What is the prediction of Y for a quarter in which X = 120? Show how you obtain your
answer.

The regression line is Y = 3.962 + 0.040451* Industry


When X=120, Y = 3.962 + 0.040451* 120 = 8.81612

c) What is the value for the coefficient of determination?


The coefficient of determination (R square) = 0.643
d) What is the value of the correlation coefficient?
The correlation coefficient is = sqrt ( 0.643) = 0.802
Question 2: An investment specialist claims that if one holds a portfolio that moves in
the opposite direction to the market index like the S&P 500, then it is possible to reduce
the variability of the portfolio's return. In other words, one can create a portfolio with
positive returns but less exposure to risk.
A sample of 26 years of S&P 500 index and a portfolio consisting of stocks of
private prisons, which are believed to be negatively related to the S&P 500 index, is
collected. A regression analysis was performed by regressing the returns of the prison
stocks portfolio (Y) on the returns of S&P 500 index (X) to prove that the prison stocks
portfolio is negatively related to the S&P 500 index at a 5% level of significance. The
results are given in the following EXCEL output.

Coefficients Standard Error T Stat P-value


Intercept 4.8660 0.3574 13.6136 8.7932E-13
S&P -0.5025 0.0716 -7.0186 2.94942E-07

a) To test whether the prison stocks portfolio is negatively related to the S&P 500 index,
the appropriate null and alternative hypotheses are, respectively,
A) H0 : 0 vs. H1 : < 0
B) H0 : 0 vs. H1 : > 0
C) H0 : r 0 vs. H1 : r < 0
D) H0 : r 0 vs. H1 : r > 0

b) To test whether the prison stocks portfolio is negatively related to the S&P 500 index,
what is the measured value of the test statistic?

The measured value of the test statistic is -7.0186

c) To test whether the prison stocks portfolio is negatively related to the S&P 500 index,
what is the p-value of the associated test statistic?

The p-value of the associated test statistic is 2.94942E-07

d) Which of the following will be a correct conclusion? Explain your answer.


A) We cannot reject the null hypothesis and, therefore, conclude that there is sufficient
evidence to show that the prisons stock portfolio and S&P 500 index are negatively
related.
B) We can reject the null hypothesis and, therefore, conclude that there is sufficient
evidence to show that the prisons stock portfolio and S&P 500 index are negatively
related.
C) We cannot reject the null hypothesis and, therefore, conclude that there is not
sufficient evidence to show that the prisons stock portfolio and S&P 500 index are
negatively related.
D) We can reject the null hypothesis and conclude that there is not sufficient evidence to
show that the prisons stock portfolio and S&P 500 index are negatively related.
Question 3: It is believed that GPA (grade point average, based on a four point scale)
should have a positive linear relationship with ACT scores. Given below is the Excel
output from regressing GPA on ACT scores using a data set of 8 randomly chosen
students from a Big-Ten university.

Regressing GPA on ACT

Regression Statistics
Multiple R 0.7598
R Square 0.5774
Adjusted R Square 0.5069
Standard Error 0.2691
Observations 8

ANOVA
df SS MS F Significance F
Regression 1 0.5940 0.5940 8.1986 0.0286
Residual 6 0.4347 0.0724
Total 7 1.0287

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%


Intercept 0.5681 0.9284 0.6119 0.5630 -1.7036 2.8398
ACT 0.1021 0.0356 2.8633 0.0286 0.0148 0.1895

a) The interpretation of the coefficient of determination in this regression is


A) 57.74% of the total variation of ACT scores can be explained by GPA.
B) ACT scores account for 57.74% of the total fluctuation in GPA.
C) GPA accounts for 57.74% of the variability of ACT scores.
D) None of the above.

b) What is the value of the measured test statistic to test whether there is any linear
relationship between GPA and ACT?

The measure test statistic to test whether there is any linear relationship between GPA
and ACT is t stat = coefficient of ACT/SE of ACT = 2.8663

c) What is the predicted average value of GPA when ACT = 20? Show how you obtain
your answer.

The regression line is GPA = 0.5681 + 0.1021 * ACT


When ACT =20 , then GPA = 0.5681 + 0.1021 * 20 =2.6101

d) What are the decision and conclusion on testing whether there is any linear
relationship at 1% level of significance between GPA and ACT scores? Explain your
answer.
The test statistic to test the linear relationship between GPA and ACT scores is
2.8663 and the corresponding p value is 0.0286.
Since p value 0.0286 is greater than 0.01 conclude that there is no significant
relationship between GPA and ACT.

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