Question

You are studying the relationship between stock returns (S) and bond returns (B). To do this you gather the daily returns of the stock market and the daily return of US Government bonds and perform a regression analysis that shows the following linear relationship: S = 0.25 B +0.05 Rsquared = 0.95 Which of the following is FALSE? The regression shows an inverse relationship between stocks and bonds The Rsquared shows that 95% of the variability of stock returns are explained by bond returns If bonds returned 3%, one would expect stock returns to be 0.8% The daily bond returns (B) would represent the "X" variable They-intercept of the regression line is 0.05 The slope of the regression line is 0.25 The daily stock returns (S) would represent the "Y" variable

Answer 1

Solution :

Regression equation is

S = 0.25 B + 0.05

This regression shows a positive relationship with stocks and bonds because slope of regression is positive 0.25

So statement 1 is false rest all other statements are true

Statement 2: R square value is 0.95 which shows that 95% of variability of stock can be explained by bond returns

Statement 3: if bond return is 3% then

S = 0.25 * 3 + 0.05 = 0.8%

Statement 4 & 7 : Y is dependent variable ( stock ) and x is independent variable (bonds )

Statement 5 and 6: intercept is 0.05 and slope is 0.25

Hence false statement is 1.