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1-15
Regression Analysis
A regression analysis has the goal of measuring how changes in one variable,
called a dependent or explained variable can be explained by changes in one or
more other variables called the independent or explanatory variables. The
regression analysis measures the relationship by estimating an equation (e.g.,
linear regression model). The parameters of the equation indicate the
relationship.
A scatter plot is a visual representation of the relationship between the
dependent variable and a given independent variable. It uses a standard twodimensional graph where the values of the dependent, or Y variable, are on the
vertical axis, and those of the independent, or X variable, are on the horizontal
axis.
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10
17
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21
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Average Return
13
14
16
17
19
20
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Slope Coefficient
Yi B0 B1 X i i
Error Term
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Yi b0 b1 X i ei
minimize e Yi - (b0 b1 Xi )
2
i
Yi b0 b1X i ei
e4
e2
e1
e3
Yi b0 b1X i
X
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48. You are conducting an ordinary least squares regression of the returns on stocks Y
and X as Y=a + b X + based on the past three years daily adjusted closing price
data. Prior to conducting the regression, you calculated the following information
from the data:
Sample covariance
Sample Variance of Stock X
Sample Variance of Stock Y
Sample mean return of stock X
0.000181
0.000308
0.000525
-0.03%
0.03%
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Notes 128
0.000181
0.5877
0.000308
Example
2%
2.9%
4.7%
1.1%
Answer: B
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Yi b0 b1 X i
(Yi Yi ) SSR
__
(Yi Y ) TSS
(Yi Y ) ESS
__
Y
b0
(Y
TSS
__
Y)
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__
(Y Y )
ESS
ESS
SSR
R
1
TSS
TSS
2
(Y Y )
i
SSR
2 R2 R2
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FRM
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