solved Question 4 Regression Analysis & Time Value of Money (15

Question 4 Regression Analysis & Time Value of Money (15 points) Part 1 Julie Nelson is a senior investment analyst with Daiwa Securities headquartered in Kyoto, Japan. The analyst specializes in the energy industry. Recently she ran a regression explaining the variation in energy consumption as a function of temperature. The total variation of the dependent variable was 140.58, the explained variation was 60.16, and the unexplained variation was 80.52. There were 60 monthly observations. (8 points) 1.1: Compute the coefficient of determination. Show your calculation. Hints: 1.2: In plain English, briefly explain the statistical meaning of R2 1.3: What is the sample correlation between energy consumption and temperature? Part 2 A price-linked derivative security pays $300 if the oil price over the next year increases by more than 5%, an event that can happen with a 60% probability. Otherwise, it pays $50. Question: If the expected return on the security is 15%, how much does the security cost? Show your calculation. (3 points) Part 3 The tables below contain the regression results with monthly returns on a large-cap mutual fund (the dependent variable) and monthly returns on a market index (the independent variable). The analysis is performed using 12 monthly observations. (4 points) Regression Statistics: Multiple R 0.776 R-squared 0.602 Standard Error 4.243 Observations 12 Regression Equation: Coefficients Standard Error t-Statistic P-value Intercept -0.287 1.314 -0.219 0.831 Slope coefficient 0.802 0.206 3.890 0.003 Question: What is the predicted return on the large-cap mutual fund for a market index return of 8%? Show your calculation.