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# Q1.

## We estimate a model relating median housing price (price) in the community t

o various community characteristics: nox is the amount of nitrogen oxide in the
air, in parts per million; dist is a weighted distance of the community from fiv
e employment centers, in miles; rooms is the average number of rooms in houses i
n the community; and stratio is the average student-teacher ratio of schools in
the community. We run the following model:
. reg price nox dist rooms stratio
Source |
SS
df
MS
-------------+-----------------------------Model | __________
4 6.6359e+09
Residual | 1.6282e+10 ___ 32498608.9
-------------+-----------------------------Total | 4.2826e+10 ___
84803032

Number of obs
F( _, ___)
Prob > F
R-squared
Root MSE

=
=
=
=
=
=

506
______
______
0.6168
______

-----------------------------------------------------------------------------price |
Coef. Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------nox | -3044.913 353.6792
_____ 0.000
-3739.79 -2350.036
dist | -965.4921 191.4962
-5.04 0.000
-1341.727 -589.2575
rooms | ________ 401.3554
16.96 0.000
6020.222
7597.316
stratio | -1269.168 127.3659
-9.96 0.000
-1519.405
-1018.93
_cons | 23716.16 5120.564
4.63 0.000
13655.73
33776.58
-----------------------------------------------------------------------------(a) There are ten missing values in the output. Fill in the blanks.
(b) Which varibale(s) is(are) individaully significant at 5% level? Why?
(c) Test whether the independent variables are jointly significant in explaining
median housing prices.
*****************************************************************
Q2. Regression analysis can be used to test whether the market efficiently uses
information in valuing stocks. For concreteness, let return be the total return
from holding the firm?s stock over the four year period from the end of 1990 to
the end of 1994.The efficient markets hypothesis says that these returns should
not be systematically related to information known in 1990. If firm characterist
ics known at the beginning of the period help to predict stock returns, then we
could use this information in choosing stocks.
For 1990, let dkr be a firm?s debt to capital ratio, let eps denotes the earning
s per share, let netinc denote net income, and let salary denote total compensat
ion for the CEO.Using data, we estimate:
.reg return dkr eps netinc salary
Source |
SS
df
MS
-------------+-----------------------------Model | __________
4 2162.31507
Residual | 210446.917 ___ 1536.10888
-------------+-----------------------------Total | 219096.178 ___ 1553.8736

Number of obs
F( _, ___)
Prob > F
R-squared
Root MSE

=
142
=
____
=
= ______
= 0.0114
= ______

------------------------------------------------------------------------------

return |
Coef. Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------dkr | .3205444 ________
1.60 0.113
-.0767426
.7178314
eps | .0426986 .0781384
____ 0.586
-.1118147
.1972119
netinc | -.0051086 .0046748
-1.09 0.276
-.0143526
.0041354
salary | .0034993 .0021935
1.60 0.113
-.0008382
.0078369
_cons | -14.37022 6.893616
-2.08 0.039
-28.00187 -.7385647
-----------------------------------------------------------------------------(a) There are ten missing values in the output. Fill in the blanks.
(b) Which varibale(s) is(are) individaully significant at 5% level?
(c)Test whether the explanatory variables are jointly significant.
(d)Is the evidence of predictability of stock returns strong or weak?
**************************************************************************
Q3. State what is multicollinearity? What is the effect of multicollinearity on
efficiency or precision of your estimates? How would you check for it?
**************************************************************************
Q4. [10 marks] Let rdintens be expenditures on research and development as a per
centage of sales. Using data for 32 firms in the chemical industry, we regress r
dintens on sales and a quadratic term in sales:
. reg rdintens sales salessq
Source |
SS
df
MS
-------------+-----------------------------Model | __________
2 8.07662836
Residual | 92.6802136
__ __________
-------------+-----------------------------Total | 108.83347
__ 3.51075711

Number of obs
F( _,
__)
Prob > F
R-squared
Root MSE

=
=
=
=
=
=

32
____
0.0973
______
0.0897
______

-----------------------------------------------------------------------------rdintens |
Coef. Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------sales | .0003006 .0001393
____ 0.039
.0000157
.0005855
salessq | -6.95e-09 3.73e-09
-1.86 0.072
-1.46e-08
6.75e-10
_cons | 2.612512 .4294418
6.08 0.000
1.734205
3.490819
-----------------------------------------------------------------------------(a) There are ten missing values in the output. Fill in the blanks.
(b) Write the least squares prediction equation.
(c) Test at 5% level to see if the quadratic term, salessq, is statistically sig
nificant.
(d) At what point does the marginal effect of sales on rdintens becomes negative
?
(e) Suggest another variable, besides sales, that could be useful in explaining
rdintens.
(f) Suppose the variable you suggested in part (e) is highly correlated with sal
es. If you included that variable in your regression model, what problem may ari
se? What would be its effect on the precision of your estimates?

(g) Suppose the variable you suggested in part (e) is highly correlated with sal
es and you do not include it in your regression model. Would your estimates be u
nbiased?