One of the most difficult tasks of developing and managing a global portfolio is assessing the risks of potential foreign investments. Duke University researcher C. R. Henry collaborated with two First Chicago Investment Management Company directors to examine the use of country credit ratings as a means of evaluating foreign investments (Journal of Portfolio Management, Winter 1995). To be effective, such a measure should help explain and predict the volatility of the foreign market in question. The researchers analyzed data on annualized risk (y) and average credit rating (x) for the 40 countries shown in the table on p. 504. An SPSS printout for a simple linear regression analysis conducted on the data is also provided on p. 503.
a. Locate the least squares estimates of ßo and ß1, on the printout
b. Plot the data in a scattergram, then sketch the least squares line on the graph.
c. Do the data provide sufficient evidence to conclude that country credit risk (x) contributes information for the prediction of market volatility (y)?
d. Use the plot, part b, to visually locate any unusual data points (outliers).
e. Eliminate the outlier(s), part d, from the data set and rerun the simple linear regression analysis. Note any dramatic changes in the results.