For Exercises 10.1 and 10.2, see page 488; for 10.3 and 10.4, see page 490; for 10.5, see pages 493–494; for 10.6 to 10.8, see pages 498–499; for 10.9 and 10.10, see page 500; and for 10.11 and 10.12, see page 502.

Question 10.3

10.3 U.S. versus overseas stock returns.

Returns on common stocks in the United States and overseas appear to be growing more closely correlated as economies become more interdependent. Suppose that the following population regression line connects the total annual returns (in percent) on two indexes of stock prices:

  1. What is in this line? What does this number say about overseas returns when the U.S. market is flat (0% return)?
  2. What is in this line? What does this number say about the relationship between U.S. and overseas returns?
  3. We know that overseas returns will vary in years that have the same return on U.S. common stocks. Write the regression model based on the population regression line given above. What part of this model allows overseas returns to vary when U.S. returns remain the same?

10.3

(a) −0.1. When the U.S. market is flat, the overseas returns will be −0.1. (b) 0.15. For each unit increase in U.S. return, the mean overseas return will increase by 0.15. (c) . The allows overseas returns to vary when U.S. returns remain the same.