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SMMD Assignment-5 Name: Shubham Chauhan l PGID: 61910037

1. Scatterplot of relationship between the three variables: Apple return, IBM return, Whole Market
return

Interpretation

Data appears to be very weakly co-related


when we observe the scatter plot. The
same has been confirmed by the value of
R2 =21.6% for the complete model. Hence
the multiple regression explains very less in
terms of variation in stocks of Apple.
Relevant plots are not straight enough for
the regression modelling.

2. Please find below the summary of model fit, ANOVA and Parameter estimates

Interpretation

1. R2 =21.6% and Radj = 21.1% represent weak regression model. It mean the model is able to explain on 21% of
the variation in apple returns with inputs of IBM returns and whole market stocks
2. F Ratio= 41.05. This represents that the overall model is signification and we can reject the Null Hypothesis
that all regression coefficients are zero. At least one of them is non-zero.
3. Regression Model: Apple Return = 0.0048217 + 1.316899(Whole market return) + 0.2275259(IBM Return)
4. Individually, Whole market return has p-value of <0.001 and IBM return has p-value of 0.0408 which are
statistically significant for 5% significance.
3. Residual versus Predicted Plot for apple return. As can be been seen from the below plot, the scatter
plot doesn’t appear to have any specific patter. Hence this is acceptable. Hence Homoskedasticity
assumption holds true.

Interpretation

Graph-1: Residual versus Predicted Value Plot – As can be


seen there is no clear pattern between the two statistics
and hence it follows Homoskedasticity

Graph-2: Residual versus Time – As no pattern appears to


be emerging, we can conclude that there is no auto-
correlation in the residuals

Graph-3: Normal Quantile plot of residual – As can be


clearly seen in the graph, the residual follow a normal
distribution without any major deviation observed.

Hence the model appears to meet the conditions for the


use of multiple regression.

4. We have been asked to calculate the 95% prediction interval of Apple return with 5% market return
and -2% IBM return.

First, we need to find the point prediction of Apple return corresponding to IBM and market
returns

Apple Return = 0.0048217 + 1.316899(Whole market return) + 0.2275259(IBM Return)


Substitute the value as given above –
Apple Return= 0.0048217 + 1.316899(5) + 0.2275259(-2) = 6.13%
Now, we know that RMSE =0.1325 and t value for DOF (300-2-1=297) and 95% Interval is 2
Prediction Interval = (6.13% ± 2*0.1325%) = (6.13%±0.265%)
Prediction Interval = (5.869%,6.399%)
Interpretation – We can expect the Apple shares to return 5.87% to 6.4% on our investments with
a prediction of 95%
5. Simple regression of Apple return with market return -

Regression Model: Apple Return = 0.0049275 + 1.5371567*(Whole market return)

Multiple Regression Slope – 1.317


Simple Regression Slope – 1.537

As can be seen, the slopes of both regression models are not same. They are different between in
simple regression model, whole market return is also taking the impact of movement of the IBM
return and hence contribution of IBM returns is included in the simple regression model. However,
in Multiple regression, the impact of IBM return has been considered in its coefficient. This is the
reason of difference in the value of two slopes.

Arriving from one to another =

Total Effect = Direct Effect + Indirect Effect


Marginal Slope = Partial Slope + Indirect Effect

1.53 = 1.3168 + (0.965*0.2275)

*Note – The numerical values have been calculated from the JMP Modelling earlier. I am not posting
graphs again to due to space constraints. Please refer to below schematic for the reference.

0.2275
IBM Return Apple Return

0.965
Market Return 1.3168

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