REVISION PAPER financing model 2021
SECTION B: SHORT ANSWER QUESTIONS
You need to answer four (4) questions in this section. The mark for each question is indicated. The total mark for this part is 40 marks.
Question 21: (10 marks)
Given a scenario (information regarding the model output)
a. What type of econometric problem might you suspect?
b. Which assumption of the multiple regression model is violated?
c. What test should you use to identify the problem?
d. What will be the effect on OLS parameter estimates?
e. What might you do to solve this problem?
Question 22: (10 marks)
Use the STATA output to answer the following questions.
Questions:
a. Report the least squares estimates of the coefficients and corresponding p–values.
b. Are the signs of these estimates consistent with economic theory? Explain your answer.
c. Determine whether the estimated coefficients are statistically significant at the 5% level of significance.
d. Is the overall significance of the model at the 5% level of significance?
e. Based on part d above, will stimulating output growth or controlling for inflation have an impact on the rate of return? Explain your answer.
f. How much of the variation in the real rate of return (on common stocks) does this model explain?
Question 23:
Given the STATA output
Questions:
a. Explain to your friend the estimated coefficients and how the independent variables affect the dependent variable.
b. List the assumptions that have been violated by this model.
c. For each assumption violated, write a short explanation to your friend on how it will affect the validity of the results.
d. Write the actions that your friend should take to deal with the assumptions violated, and how this would help improve the analysis.
e. Revised Model
Below is the Stata output that their regression estimates have generated, in addition to their additional tests. Examine these results, and discuss them.
Question 24:
Given the STATA output
Questions:
a. Identify any problems with that you can detect in these results.
b. Present solutions to these problems which may enable an improvement in the estimation of this model.
