Question - U.S. versus overseas stock returns. Returns on common stocks in the United States and overseas appear to be growing more closely correlated as economies become more interdependent. Suppose that the following population regression line connects the total annual returns (in percent) on two indexes of stock prices:
MEAN OVERSEAS RETURN = -0.4+1.06×U.S. RETURN
(a) What is β0 in this line? What does this number say about overseas returns when the U.S. market is flat (0% return)?
(b) What is β1 in this line? What does this number say about the relationship between U.S. and overseas returns?
(c) We know that overseas returns will vary in years having the same return on U.S. common stocks. Write the regression model based on the population regression line given above. What part of this model allows overseas returns to vary when U.S. returns remain the same?