Trying to figure this out. It was an exam question from last year.
TLB EXHIBIT 1
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.397871332
R Square 0.158301597
Adjusted R Square 0.146771482
Standard Error 0.099101922
Observations 75
ANOVA
df SS MS F Significance F
Regression 1 0.134839089 0.134839089 13.72940301 0.000407887
Residual 73 0.716946939 0.009821191
Total 74 0.851786028
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.012199246 0.011491282 1.061608746 0.291912927 -0.010702847 0.035101338
Rm 1.222767145 0.330003035 3.705320905 0.000407887 0.565072054 1.880462236
PRG
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.24432461
R Square 0.059694515
Adjusted R Square 0.046813618
Standard Error 0.03658517
Observations 75
ANOVA
df SS MS F Significance F
Regression 1 0.006202953 0.006202953 4.63434453 0.03464324
Residual 73 0.097708651 0.001338475
Total 74 0.103911604
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.008975806 0.004242203 2.115835815 0.037770035 0.000521107 0.017430505
Rm 0.262261834 0.121826267 2.15275278 0.03464324 0.019462438 0.50506123
2. Exhibit 1 shows two regression outputs, one for the company identified as “TLB”, the other for company identified as “PRG”. Each output was obtained by regressing the respective company’s monthly returns on the monthly returns of the S&P 500 Index. The time period covered is January 1, 2002 to April 1, 2008. In Exhibit 1, the label “Rm” stands for the “Returns on the market portfolio”, in our case, the S&P 500 Index.
Please base your answers to this question on information provided in Exhibit 1. Assume that there is nothing “unusual” about the time period spanned, and assume that the S&P 500 Index is the appropriate market proxy.
A) Which of the two firms, “TLB” or “PRG”, appears to have the higher UNSYTEMATIC risk? Cite specific evidence to support your answer.
B) In the CAPM context (i.e. one in which everyone holds a well-diversified portfolio), which of the two firms has the higher relevant risk? Explain.
C) Based on the regression output, how confident can we be that there IS a relationship between the returns for the company and the returns on the market? Make a statement for each company, and cite evidence.
D) One of the companies in Exhibit 1 is a leader in the Home Construction business, while the other is a leader in the Household Supplies sector (diapers, detergent, etc.). Based on the output, match the company name (TLB/PRG) with the appropriate sector (Home Construction/Household Supplies), and provide a reason for your choice.