U.S. versus overseas stock returns. How are returns on common stocks in overseas markets related to returns in U.S. markets? Consider measuring U.S. returns by the annual rate of return on the Standard & Poor’s 500 stock index and overseas returns by the annual rate of return on the Morgan Stanley Europe, Australasia, Far East (EAFE) index. Both are recorded in percents. Here is part of the Minitab output for regressing the EAFE returns on the S&P 500 returns for the 25 years 1989 to 2013.
The regression equation is
Analysis of Variance
| Source | DF | SS | MS | F |
| Regression | 5587.0 | |||
| Error | ||||
| Total | 24 | 9940.6 |
Exercises 10.60 through 10.64 use this output.
10.63 Inference for the intercept?
The mean of the S&P 500 returns for these years is 11.97. From this and information from the previous exercises, find the standard error for the least-squares intercept . Use this to construct a 95% confidence interval. Finally, explain why the intercept is meaningful in this example.
eafe
10.63
. The interval is (−9.50691, 4.09135). This intercept is meaningful because it tells us what the EAFE is when the S&P is 0, meaning no return in U.S. markets.