Question

Multiple R R-Square Adjusted R-Square Standard Error Observations 0.35 002 845 Coefficients Standard Error -Statp-Value 4.0540.260.80 1.32097010 Intercept Market Use the table above for problems 2-5. Problem 2) What is the Alpha of a stock? Problem 3) What does the Beta tell? Problem 4) How much of the variance is explained by this regression? Problem 5) What is the characteristic line for this stock?

Answer 1

Ans 1)

Alpha of a stock is the intercept of equation that describes the return of stock therefore in our case Alpha is 4.05

Ans 2)

Beta tells us the responsiveness of stock price with respect to the movement in market returns that means highly sensitive stock will have higher beta and lower beta in other case

Ans 3)

It can be expressed as adjusted R^2 hence only 2% of variation will be explained by this regression

Ans 4)

Rt=4.05+1.32Rm,t+et

Return on stock =Rt

Return on Market at time t=Rm,t

et=IID error term withN(0,sigma ^2)