**Not sure if anyone else is coming up with +.49%, but the solution is not incorporating a negative 1% in the S&P 500 variable…Any thoughts?**

Hamilton’s Regression Model Electric Utility Industry

Variable

Coefficient

t-statistic

p-value

Constant

-0.0069

-0.013

0.99

S&P 500

0.3625

6.190

<0.01

SPREAD

1.0264

4.280

<0.01

2.) If Hamilton assumes that the monthly value for SPREAD is 1.5% and the monthly value for the S&P 500 is –1.0%, the predicted monthly return for the electric utility equity index is closest to:

A. 1.17%. B. 1.89%. C. –0.49%.

Answer = A

Substituting the assumed values into the estimated model results from Exhibit 1 to determine the predicted monthly return: Monthly return = –0.0069% + (1.0264 × 1.5%) + (0.3625 × –1.0%) = 1.17%.