A regression is run for each of 3 stocks in which the Y variable is the monthly return on the stock and the X variable is the monthly return on a market index. The data are coded in decimal form, meaning that a 5% return would be 0.05 in the data. It can be assumed during this period that the monthly risk-free rate was 0%. The regression results look like this:
Stock 1
Y = 0.0139 + 1.52X R-square = 0.15
Stock 2
Y = -0.0054 + 1.19x R-square = 0.47
Stock 3
Y = 0.002 + 1.60x R-square = 0.23
Which stock earned the highest return during the historical period over which you estimated these regressions?
Assuming the Capital Asset Pricing Model (CAPM) is true, which stock has the highest expected return in the future?
One of these firms is a diversified conglomerate, and the other two operated only in one or two lines of business. Which is the conglomerate and why?