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Consider the following estimated regression equation:
Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi − 2.0 COMPi + 8.0 CAPi
Sales are in millions of dollars. An analyst is given the following predictions on the
independent variables: R&D = 5, ADV = 4, COMP = 10, and CAP = 40.
The predicted level of sales is closest to:
A) $320.25 million.
B) $300.25 million.
C) $310.25 million.
Miles Mason, CFA, works for ABC Capital, a large money management company based in
New York. Mason has several years of experience as a financial analyst, but is currently
working in the marketing department developing materials to be used by ABC's sales team
for both existing and prospective clients. ABC Capital's client base consists primarily of large
net worth individuals and Fortune 500 companies. ABC invests its clients' money in both
publicly traded mutual funds as well as its own investment funds that are managed in-
house. Five years ago, roughly half of its assets under management were invested in the
publicly traded mutual funds, with the remaining half in the funds managed by ABC's
investment team. Currently, approximately 75% of ABC's assets under management are
invested in publicly traded funds, with the remaining 25% being distributed among ABC's
private funds. The managing partners at ABC would like to shift more of its client's assets
away from publicly traded funds into ABC's proprietary funds, ultimately returning to a
50/50 split of assets between publicly traded funds and ABC funds. There are three key
reasons for this shift in the firm's asset base. First, ABC's in-house funds have outperformed
other funds consistently for the past five years. Second, ABC can offer its clients a reduced
fee structure on funds managed in-house relative to other publicly traded funds. Lastly, ABC
has recently hired a top fund manager away from a competing investment company and
would like to increase his assets under management.
ABC Capital's upper management requested that current clients be surveyed in order to
determine the cause of the shift of assets away from ABC funds. Results of the survey
indicated that clients feel there is a lack of information regarding ABC's funds. Clients would
like to see extensive information about ABC's past performance, as well as a sensitivity
analysis showing how the funds will perform in varying market scenarios. Mason is part of a
team that has been charged by upper management to create a marketing program to
present to both current and potential clients of ABC. He needs to be able to demonstrate a
history of strong performance for the ABC funds, and, while not promising any measure of
future performance, project possible return scenarios. He decides to conduct a regression
analysis on all of ABC's in-house funds. He is going to use 12 independent economic
variables in order to predict each particular fund's return. Mason is very aware of the many
factors that could minimize the effectiveness of his regression model, and if any are present,
he knows he must determine if any corrective actions are necessary. Mason is using a
sample size of 121 monthly returns.