A financial analyst seeks to determine the relationship between the return on PepsiCo's common stock and the return on the stock market as a whole. She has collected data on the monthly returns of PepsiCo's stock and the monthly returns of the Standard & Poor's stock index for the last five years. Using these data, she has estimated the following regression equation
RPep = .06 + .92RS&P.
Here, returns are expressed in percentage terms. The t-values for the coefficients are 2.78 and 3.4, respectively, and the equation's R2 is .28.
a. Do the respective coefficients differ significantly from zero?
b. The value of R2 seems quite low. Does this mean the equation is invalid? Given the setting, why might one expect a low R2?
c. Suppose the S&P index is expected to fall by 1 percent over the next month. What is the expected return on PepsiCo's stock?