1) The book-to-market ratio and the size of a company's equity are two factors that have been asserted to be useful in explaining the cross-sectional variation in asset returns. Based on this assertion, you want to estimate the following regression model:
where is the return of asset i,
is the asset i's book-to-market ratio, and
is the market value of asset i's equity
A colleague suggests that this regression specification may be erroneous, because he believes that the book-to-market ratio may be related to the ...
Solution Summary
The solution discusses the problem regarding multicollinearity.
Statistics: Define autocorrelation, and multicollinearity. ... Define multicollinearity in the following terms: a. In which type of regression is likely to occur? ...
Statistics: Hypothesis testing, Regression analysis, Autocorrelation, Multicollinearity: ... b. What is the negative impact of multicollinearity in a regression? ...
... Should the analyst be concerned about multicollinearity? Why? ... A rule of thumb says that if the variance inflation factor is >5, then multicollinearity is high. ...
This posting provides interpretation of regression output including Rsquare, correlation matrix, multicollinearity, p-value etc. Please see the attached file. ...
