TABLE 13-7 An Investment Specialist Claims That If One Holds a Portfolio

question 167

Multiple Choice

TABLE 13-7
An investment specialist claims that if one holds a portfolio that moves in the opposite direction to the market index like the S&P 500, then it is possible to reduce the variability of the portfolio's return. In other words, one can create a portfolio with positive returns but less exposure to risk.
A sample of 26 years of S&P 500 index and a portfolio consisting of stocks of private prisons, which are believed to be negatively related to the S&P 500 index, is collected. A regression analysis was performed by regressing the returns of the prison stocks portfolio (Y) on the returns of S&P 500 index (X) to prove that the prison stocks portfolio is negatively related to the S&P 500 index at a 5% level of significance. The results are given in the following Excel output.

Note: 2.94942E-07 = 2.94942*10⁻⁷
-Referring to Table 13-7, which of the following will be a correct conclusion?

• A) You cannot reject the null hypothesis and, therefore, conclude that there is sufficient evidence to show that the prisons stock portfolio and S&P 500 index are negatively related.
• B) You can reject the null hypothesis and, therefore, conclude that there is sufficient evidence to show that the prisons stock portfolio and S&P 500 index are negatively related.
• C) You cannot reject the null hypothesis and, therefore, conclude that there is insufficient evidence to show that the prisons stock portfolio and S&P 500 index are negatively related.
• D) You can reject the null hypothesis and conclude that there is insufficient evidence to show that the prisons stock portfolio and S&P 500 index are negatively related.

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Definitions:

Cross-Price Elasticity

A measure of how the quantity demanded of one good responds to a change in the price of another good, indicating the degree of substitutability or complementarity between them.

Substitutes

Products or services that can replace or serve as alternatives to another, often influencing consumer choices and market competition.

Income Elasticity

A measure of how much the quantity demanded of a good responds to a change in consumers' income, holding all other factors constant.

Normal Good

A good for which a rise in income increases the demand for that good—the “normal” case.