A Researcher Wants to Examine How the Remaining Balance on $100,000

question 89

Multiple Choice

A researcher wants to examine how the remaining balance on $100,000 loans taken 10 to 20 years ago depends on whether the loan was a prime or subprime loan.He collected a sample of 25 prime loans and 25 subprime loans and recorded the data in the following variables: Balance = the remaining amount of loan to be paid off (in $) ,
Time = the time elapsed from taking the loan,
Prime = a dummy variable assuming 1 for prime loans,and 0 for subprime loans.
The regression results obtained for the models:
Model A: Balance = β₀ + β₁Prime + ε
Model B: Balance = β₀ + β₁Time + β₂Prime + β₃Time × Prime + ε
Model C: Balance = β₀ + β₁Prime + β₂Time × Prime + ε,
Are summarized in the following table. Note: The values of relevant test statistics are shown in parentheses below the estimated coefficients.
Using Model B,what is the null hypothesis for testing the joint significance of the variable Time and the interaction variable Time × Prime?

• A) H₀: β₁ = β₂ = β₃ = 0
• B) H₀: β₁ = 0 and β₃ = 0
• C) H₀: β₁ = 0 or β₃ = 0
• D) H₀: β₁ ≠ 0 or β₃ ≠ 0

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Definitions:

Security Market Line

A representation in finance that shows the expected return of investments at different levels of risk, based on the capital asset pricing model (CAPM).

Beta

A gauge of the variability of a stock's value relative to the comprehensive market.

Market Average

A statistical measure that represents the overall market or a specific segment of it, commonly used to track market performance.

Return

The profit or deficit experienced on an investment during a given period, represented as a percentage of the original investment's value.