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%.