43 - Chapter 3, Exercise Solutions, Principles of...

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Chapter 3, Exercise Solutions, Principles of Econometrics, 3e 43 Exercise 3.7 (continued) (b) We set up the hypotheses 0 :1 j H β ≥ versus 1 j H β < . The relevant test statistic, given H 0 is true, is () 118 1 ~ se j j b tt b = The rejection region is t < 1.658 where (0.05,118) 1.658 c = =− . The value of the test statistic is 0.4030 1 7.256 0.08228 t == Since t = 7.256 < t c = 1.658, we reject H 0 and conclude that Mobil-Exxon’s beta is less than 1. A beta equal to 1 suggests a stock's variation is the same as the market variation. A beta less than 1 implies the stock is less volatile than the market; it is a defensive stock. (c) We set up the hypotheses 0 j H β ≤ versus 1 j H β > . The relevant test statistic, given H 0 is true, is 118 1 ~ se j j b b = The rejection region is t > 1.658 where (0.95,118) 1.658 c = = . The value of the test statistic is 1.4299 1 2.284 0.1882 t Since t = 2.284 > t c = 1.658, we reject H 0 and conclude that Microsoft’s beta is greater than 1. A beta equal to 1 suggests a stock's variation is the same as the market variation. A
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