# Ee chapter 9 problem 12

On the tab labeled “Data” you will find the financial data for Problem #12 on Page 474 in Chapter 9.  Carefully read the statement of the problem in the textbook and then review the given data.

Proceed to the Solutions tab where you will find five questions.   Each question is worth 4 points:  2 points for producing the correct technical information and 2 points for a clear, concise, grammatically answer to the question.  Questions should be answered on the Solutions tab and typed in unbolded black font right after the statement of the question.

Good luck, enjoy the collaboration and as always…HAVE FUN!

 PE Ratio Risk Return 7.4 1.0 7.6 11.1 1.3 13.0 8.7 1.1 8.9 11.2 1.2 10.9 11.6 1.7 12.1 12.2 1.3 12.8 12.5 1.2 11.3 12.5 1.3 14.1 13.0 1.6 14.8 13.4 1.4 16.7

Question 1 (4 Points) Carefully follow the instructions on Page 435 and construct two scatterplots:  one a a new tab labeled “PE Ratio” with PE Ratio data as the independent variable and the associated Return data as the dependent variable and a second scatterplot on a new tab labeled “Risk” with Risk data as the independent variable and the associated Return data as the dependent variable.  Be sure to properly label each axis.  For each scatterplot, discuss the linear relatioship between variables.

Question 2 (4 Points) Carefully follow the instructions starting on the bottom of Page 443 continuing onto Page 444 and show the regression equation and R-Squared value on each of the scatterplots built in Question 1.  What is the regression equation for each independent variable?   If you had to choose between the two equations, which best estimates Return?  Why?

Question 3 (4 Points) Looking at the original data, we see there is an investment that returned 12.8 percent while having a 12.2 PE Ratio.  Using the appropriate results obtained in Question 2, estimate the return for this investment assuming its 12.2 PE Ratio.  What is the residual as compared to the actual 12.8 Return?

Question 4 (4 Points) Carefully following the information in Sections 9.12, 9.13, and 9.14, on a new tab labeled “Multiple Regression” obtain the regression information assuming two independent variables, PE Ratio and Risk with Return as the dependent variable.   What is the regression equation?   This equation should be given in similar form as the equation shown on Page 459, Equation 9.25.  Make sure you substitute the appropriate values for bo, b1, and b2 from the regression analysis!  Which goodness of fit value best measures the relationship between these three variables?

Question 5 (4 Points) Looking at the original data, we see there is an investment which returned 7.6 percent while having a 7.4 PE Ratio and a Risk Evalution of 1.  Using the results obtained in Question 4, estimate the Return on this investment assuming its 7.4 PE Ration and Risk Evaluation of 1.  What is the residual as compared to the actual 7.6 return?