Problems

The file Delldata.xlsx contains monthly returns for the Standard & Poor’s stock index and for Dell stock. The beta of a stock is defined as the slope of the least-squares line used to predict the monthly return for a stock from the monthly return for the market.

1. Estimate the beta of Dell.

2. Interpret the meaning of Dell’s beta.

3. If you believe a recession is coming, would you rather invest in a high beta or low beta stock?

4. During a month in which the market goes up 5 percent, you are 95 percent sure that Dell’s stock price will increase between which range of values?

The file Housedata.xlsx gives the square footage and sales prices for several houses in Bellevue, Washington.

1. You are going to build a 500-square-foot addition to your house. How much do you think your home value will increase as a result?

2. What percentage of the variation in home value is explained by variation in house size?

3. A 3000-square-foot house is selling for $500,000. Is this price out of line with typical real estate values in Bellevue? What might cause this discrepancy?

4. We know that 32 degrees Fahrenheit is equivalent to 0 degrees Celsius, and that 212 degrees Fahrenheit is equivalent to 100 degrees Celsius. Use the trend curve to determine the relationship between Fahrenheit and Celsius temperatures. When you create your initial chart, before clicking Finish, you must indicate that data is in columns and not rows, because with only two data points, Excel assumes different variables are in different rows.

5. The file Betadata.xlsx contains the monthly returns on the Standard & Poor’s index as well as the monthly returns on Cinergy, Dell, Intel, Microsoft, Nortel, and Pfizer. Estimate the beta of each stock.

6. The file Electiondata.xlsx contains, for several elections, the percentage of votes Republicans gained from voting machines (counted on election day) and the percentage Republicans gained from absentee ballots (counted after election day). Suppose that during an election, Republicans obtained 49 percent of the votes on election day and 62 percent of the absentee ballot votes. The Democratic candidate cried “fraud.” What do you think?