Question

An investment analyst estimates the following regression between the return on a stock (R) and the return on S&P 500 index (RSP):R = 5% + 1.2 RSP + error term

Assuming error term is zero (“0”), Estimate the change in the return on the stock when the return on the S&P 500 index changes from 11% to 14%.

A). 4.5%

B). 3.6%

C). 5.3%

D). 6.8%

E). 3.4%

Answer 1

Correct answer: B). 3.6%

When, return on S&P 500 = 11%

Return on stock would be:

When, return on S&P 500 = 14%

Return on stock would be:

Thus, change in return on the stock would be: