Question

The closing stock price for each of two stocks was recorded over a 12-month period. The closing price for the Dow Jones Industrial Average (DJIA) was also recorded over this same time period. These values are shown in the following table:

Month	DJIA	Stock 1	Stock 2
1	11,168.00	48.5	32.4
2	11,150.00	48.2	31.7
3	11,186.00	44.5	31.9
4	11,381.00	44.7	36.6
5	11,679.00	49.3	36.7
6	12,081.00	49.3	38.7
7	12,222.00	46.1	39.5
8	12,463.00	46.2	41.2
9	12,622.00	47.7	43.3
10	12,269.00	48.3	39.4
11	12,354.00	47	40.1
12	13,063.00	47.9	42.1
13	13,326.00	47.8	45.2

(a) Develop a regression model to predict the price of stock 1 based on the Dow Jones Industrial Average.

(b) Develop a regression model to predict the price of stock 2 based on the Dow Jones Industrial Average.

(c) Which of the two stocks is most highly correlated to the Dow Jones Industrial Average over this time period?

Answer 1

Solution:

A) Stock1 = b0 + b1* DJIA

y1^ = 42.4325 + 0.000407*DJIA

R^2 = 0.035204

B)

y2^ = -31.54007 + 0.005789*DJIA

R^2 = 0.9239560

C) since R^2 in case of stock 2 is much more than that of stock 1

stock 2 is most highly correlated with DJIA