500 Index, using the monthly return on Mid Cap stocks as the dependent variable and the monthly return on the S& 500 as the independent variable. The results of the regression are shown below:
3.A simple linear regression is run to quantify the relationship between the return on the common stocks of medium sized companies (Mid Caps) and the return on the S& 500 Index, using the monthly return on Mid Cap stocks as the dependent variable and the monthly return on the S& 500 as the independent variable. The results of the regression are shown below:
| Coefficient | Standard Error of coefficient | t-Value |
Intercept | 1.71 | 2.950 | 0.58 |
S& | 1.52 | 0.130 | 11.69 |
R2= .599 | | | |
Use the regression statistics presented above and assume this historical relationship still holds in the future period. If the expected return on the S& 500 over the next period were 11%, the expected return on Mid Cap stocks over the next period would be:
A) 33.8%
B) 25.6%
C) 18.4%
D) 20.3%
The correct answer was C)
y = intercept + slope(X)
Mid Cap Stock returns =1.71 + 1.52(11) =18.4%
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