An empirical finance professor estimates the following regression between the return on a stock, R, and the return on S&P 500 index, Rsp:
R = 5% + 1.1 Rsp + error term -
If the regression R-square is 0.25, estimate the change in the return on the stock when the return on the S&P 500 index changes from 12% to 15%.
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A. B. C. D.D
With the given regression, the change in the return on the stock when the return on the S&P 500 index changes by one unit equals the slope coefficient, 1.1.
Hence, when the return on the S&P 500 index changes by 3% from 12% to 15%, the return on the stock will change by 1.1*3% = 3.3%