DAL ASSIGNMENT 1

Pedigree vs. Grit: Predicting Mutual Fund

Manager Performance

Submitted By:

Vasantada Srikanth

Roll No: 2016PGP423

Section: A
Question 1

A) Although the R2 value is low (4.33%) it does not mean that the regression is wrong.
The p-value of the regression is 0.0002445 which is less than 0.05 and the F value
4.839 exceeds the critical F value of 1. So the regression is statistically significant.

B) When two variables in a regression model have high level of correlation (above 90%)
between them, meaning that one can be linearly predicted from the others with a
substantial degree of accuracy. In this situation the coefficient estimates of the
multiple regression may change erratically in response to small changes in the model
or the data. In these cases regression will have high R square value but regression
model will be wrong. This is called as Multi Co-linearity problem.

C) From the Plot Residual vs Fitted Values graph, we can observe that there is no
specific pattern. If there is no pattern, then we can say that the relationship is linear.
So, relationship assumption is valid
Graph shows that variances of the error terms is not increasing or decreasing with the
value of the response. So, homoscedasticity assumption is valid.

Question 2:

A) From the regression analysis we get following results:

Regression Equation:
RET = - 2.642159 - 2.110461GRI + 0.005735 SAT -0.180647 MBA 0.068893AGE
0.118722TEN

From case

GRI SAT MBA AGE TEN

BOB 1 1042 0 35 5
ROCKEFELLER 1 1355 1 32 2

By substituting in the regression equation we get,

RET of BOB = -1.781615

RET of Rockefeller = 0.395638

Between Bob and Rockfeller, Rockfeller expected to have higher Returns.

B) Based on the calculation done above if hired by AMBTPM Rockfeller expected to

earn higher returns.
Question 3:

A) If Bob attended Princeton instead of Ohio then both their SAT scores will be 1355.

Regression Equation:
RET = - 2.642159 - 2.110461GRI + 0.005735 SAT -0.180647 MBA 0.068893AGE
0.118722TEN

From case

GRI SAT MBA AGE TEN

BOB 1 1355 0 35 5
ROCKEFELLER 1 1355 1 32 2

By substituting in the regression equation we get,

New RET of BOB = 0.01318262

RET of Rockefeller = 0.395638

We can observe that his return on current fun is increased because of the positive
coefficient. But it is still less than Rockfeller.

B) If Bob managed growth fun new GRI will be 0.

Regression Equation:
RET = - 2.642159 - 2.110461GRI + 0.005735 SAT -0.180647 MBA 0.068893AGE
0.118722TEN

From case

GRI SAT MBA AGE TEN

BOB (Growth) 0 1355 0 35 5

By substituting in the regression equation we get,

New RET of BOB = 0.01318262

Original RET of BOB = -1.781615

From the analysis we can say, If he were to manage a growth fund instead of an
income fund, then he would achieve at least 1% higher return.
Question 4:

A) By Regression between RET and MBA we get following Results:

Call:
lm(formula = RET ~ MBA, data = myData)

Residuals:
Min 1Q Median 3Q Max
-33.698 -4.436 -0.409 4.210 36.697

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) -0.7238 0.5943 -1.218 0.224
MBA 0.3349 0.7545 0.444 0.657

Residual standard error: 8.508 on 538 degrees of freedom

Multiple R-squared: 0.0003662, Adjusted R-squared: -0.001492
F-statistic: 0.1971 on 1 and 538 DF, p-value: 0.6573

The linear regression equation is performed by taking MBA as independent variable , while
keeping all other TEN, AGE,GRI & SAT factors constant.

Since the Coefficient of MBA is positive a person with MBA will outperform with person
without MBA. But p- value is more than > 0.05 and R square is also pretty low, this questions
the validity of the regression equation.

B) From the analysis we can observe that the coefficient of the MBA is positive. If a person
without MBA gets higher returns, then the coefficient of Beta should be negative. Since that
is not case, a person with MBA will get higher returns.

Question 5:

A) Lowest level of significance for Age= 100 P value for AGE

= 100 10.006

= 89.994%

B) Since Coefficient off age increases Returns will be negatively related to age. As age
increases, managers can commit more errors because they can be forgiven for one
more errors. So this will increase the negative returns.So, survivorship bias will
exacerbate the effect seen in Part A.
Question6:

A) From Table-1 p-value of MBA and TEN is more than 15%. So the significant level of
15% both of these is removed and regression is run.

The Regression Results

Call:
lm(formula = RET ~ GRI + SAT + AGE, data = myData)

Residuals:
Min 1Q Median 3Q Max
-34.199 -4.403 -0.348 4.074 35.142

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) -2.583922 3.340350 -0.774 0.43954
GRI -2.111005 0.738580 -2.858 0.00443 **
SAT 0.006242 0.002593 2.407 0.01642 *
AGE -0.095959 0.036555 -2.625 0.00891 **
---
Signif. codes: 0 *** 0.001 ** 0.01 * 0.05 . 0.1 1

Residual standard error: 8.355 on 536 degrees of freedom

Multiple R-squared: 0.03965, Adjusted R-squared: 0.03428
F-statistic: 7.377 on 3 and 536 DF, p-value: 7.505e-05

New Regression Equation:

RET = -2.583922 -2.111005 GRI + 0.006242 SAT 0.095959 AGE

Residual vs. Fitted value graph shows that both linearity and homoscedasticity
assumptions are valid.

B) Coefficient of Age in old Regression = -0.068893

Coefficient of Age in New Regression = -0.095959

Coefficient of AGE is becoming more negative because we are removing MBA and
TEN variables which had negative coefficients. So, to accommodate their negative
coefficients , coefficient of AGE would be more negative.

Question7:

A) By Running Regression of growth vs Return Keeping others constant, We get

following results.

Call:
lm(formula = RET ~ GRI, data = myData)

Residuals:
Min 1Q Median 3Q Max
-34.818 -4.489 -0.043 4.265 35.578

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 0.3959 0.4664 0.849 0.39634
GRI -2.3119 0.7427 -3.113 0.00195 **
---
Signif. codes: 0 *** 0.001 ** 0.01 * 0.05 . 0.1 1

Residual standard error: 8.434 on 538 degrees of freedom

Multiple R-squared: 0.01769, Adjusted R-squared: 0.01587
F-statistic: 9.69 on 1 and 538 DF, p-value: 0.001951

Regression Equation:
RET = 0.3959-2.3119 GRI

Based on graph of Residual vs Fitted Values, both the assumptions linearity and
homoscedasticity are valid

Question8:

A) Running the Regression model we get following results

Call:
lm(formula = RET ~ SAT + GRI + TEN, data = myData)
Residuals:
Min 1Q Median 3Q Max
-34.180 -4.482 -0.298 4.223 35.667

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) -4.863173 3.065520 -1.586 0.11324
SAT 0.005175 0.002614 1.979 0.04829 *
GRI -2.209624 0.736785 -2.999 0.00283 **
TEN -0.183201 0.073413 -2.495 0.01288 *
---
Signif. codes: 0 *** 0.001 ** 0.01 * 0.05 . 0.1 1

Residual standard error: 8.36 on 536 degrees of freedom

Multiple R-squared: 0.03848, Adjusted R-squared: 0.0331
F-statistic: 7.15 on 3 and 536 DF, p-value: 0.0001027

Regression Line

RET = -4.863173 -2.209624 GRI + 0.005175 SAT -0.183201TEN

Substituting we get

Estimated return = 2.14853%

B) I am 99.79667% confidence that RET>0

I used standard error of fitted values

C) I am 80.78696 confidence that RET>1.5%,

I used std error of fitted values
Question9:

A) No change. Larger sample will not affect the coefficients of regression.

B) Larger sample will reduce standard error, so t statistic value will increase and my
confidence that RET>0 will increase

C) Larger sample will reduce standard error, so t statistic value will increase and my
confidence that RET>1.5% will increase

Question10:

By running regression against Age vs GRI + SAT + MBA + TEN, we get following results
Call:
lm(formula = AGE ~ GRI + SAT + MBA + TEN, data = myData)

Residuals:
Min 1Q Median 3Q Max
-16.2663 -7.1134 -0.1337 5.9529 25.7561
Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 32.186084 3.167679 10.161 < 2e-16 ***
GRI 1.424150 0.761391 1.870 0.06197 .
SAT 0.007759 0.002729 2.843 0.00464 **
MBA -1.879255 0.778033 -2.415 0.01605 *
TEN 0.942057 0.076118 12.376 < 2e-16 ***
---
Signif. codes: 0 *** 0.001 ** 0.01 * 0.05 . 0.1 1

Residual standard error: 8.638 on 535 degrees of freedom

Multiple R-squared: 0.2425, Adjusted R-squared: 0.2368
F-statistic: 42.82 on 4 and 535 DF, p-value: < 2.2e-16

Here although the GRI coefficient is positive. P value of GRI is more than 5% i.e. 6.197%.
So we cannot say with 5 percent level of significance.

Question11:

Taking out Fund type and Tenure out of equation, we get following regression results
call:
lm(formula = RET ~ SAT + MBA + AGE, data = myData)

Residuals:
Min 1Q Median 3Q Max
-33.469 -4.666 -0.145 3.858 35.757

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) -3.152470 3.364309 -0.937 0.34916
SAT 0.006528 0.002646 2.468 0.01392 *
MBA -0.216997 0.761813 -0.285 0.77587
AGE -0.106347 0.037002 -2.874 0.00421 **
---
Signif. codes: 0 *** 0.001 ** 0.01 * 0.05 . 0.1 1
Residual standard error: 8.418 on 536 degrees of freedom
Multiple R-squared: 0.02516, Adjusted R-squared: 0.01971
F-statistic: 4.612 on 3 and 536 DF, p-value: 0.003385

Regression Equation:
RET = -3.152470 + 0.006528SAT -0.216997 MBA -0.106347 AGE

From case

SAT MBA AGE

BOB 1042 0 35
ROCKEFELLER 1355 1 32

RET of BOB = -0.072439

RET of Rockefeller = 2.072639
Between Bob and Rockfeller, Rockfeller expected to have higher Returns.
I will choose Rockfeller