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LOS 7.e: Explain the assumptions underlying linear
regression and interpret regression coefficients. MODULE 7.2: LINEAR REGRESSION: INTRODUCTION
SIMPLE LINEAR REGRESSION MODEL
The linear equation (line of best fit, or regression line), takes the form:
Model Prediction/Meaning?
If the S&P 500 excess return is –7.8% (see May 2014), then the ABC excess
return would be –2.3% + (0.64)(–7.8%) = –7.3%.
The residual for May 2014 is 8.4%, which is the difference between the actual
ABC excess return (1.1%) and the predicted return (–7.3%).
