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Please help with this problem, I want to say that it deals with multicollinearity. Please help me.

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See the attached file.

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.