Explanation:
This question is answered using two steps: Solve for the predicted value of HRF:
HRF = −1.73% + (0.47)(8.9%) = 2.45%
Solve for the prediction interval:
[2.45% ± (2.021 × 2.98%)] = 2.45% ± 6.02%, or −3.57% to 8.47%
(Book 2, Module 17.2, LO 17.f)
Question 26
A risk analyst has been asked by her fund manager to develop a 95% prediction interval for HRF, one of the stock holdings in their fund. The analyst has gathered the following information:
| Data Item | Data |
|---|---|
| Regression Equation | HRF = −1.73% + (0.47)(RUT) |
| Russell 2000 (RUT) Excess Returns | 8.9% |
| Sample Size | 42 observations |
| 5% Two-Tailed Critical Value | 2.021 |
| Standard Error | 2.98% |
The prediction interval developed by the analyst at a 95% confidence level should be closest to:
A
0.43% to 4.57%.
B
−0.53% to 5.43%.
C
−3.57% to 8.47%.
D
−7.75% to 4.29%.
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