Reading 11- LOS F (Part 1): : Q3 class, monthly, between, companies, 500

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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& 500	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%

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The correct answer was C)

y = intercept + slope(X)
Mid Cap Stock returns =1.71 + 1.52(11) =18.4%