Financial Risk Manager Part 1
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An analyst uses the following regression model to explain stock returns:
Dependent variable:
ASR = Annual stock returns (%)
Independent variables:
MCP = Market capitalization (divided by $1 million to simplify modeling)
SEF = Stock exchange firm, where SEF = 1 if the stock is that of a firm listed on the New York Stock Exchange and SEF = 0 if not listed
FMR = Forbes magazine ranking (FMR = 4 is the highest ranking)
If the regression equation is 0.6330 + 0.0840(MCP) + 0.5101(SEF) + 0.7(FMR), then what is the expected amount of stock return that would be attributed to it being a listed stock?
Other
Community
NNikitesh
A
1.11 + 0.5101
B
0.1235
C
0.5101
D
1.11 + 0.1235
Explanation:
The regression equation is: ASR = 0.6330 + 0.0840(MCP) + 0.5101(SEF) + 0.7(FMR)
The coefficient on SEF (0.5101) represents the expected change in annual stock returns when SEF changes from 0 to 1, holding all other variables constant. Since SEF is a dummy variable where:
- SEF = 1 if the stock is listed on NYSE
- SEF = 0 if not listed
The coefficient 0.5101 represents the additional return attributed to being a listed stock. Therefore, the expected amount of stock return attributed to it being a listed stock is simply the coefficient value 0.5101.
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