UNIVERSITY EXAMINATIONS: 2024/2025
SCHOOL OF BUSINESS
ORDINARY EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
STA 3201: INTRODUCTION TO ECONOMETRICS
FULL TIME
DATE: DECEMBER 2024 TIME: 2 HOURS
Answer Question ONE and Any other TWO
You must show your workings
QUESTION ONE [20 MARKS]
A student intern at the investment firm of McMillan & Associates was given the assignment of
determining the regression model of the annual rate of return (y) for the portfolio on the number
of individual stocks in a client’s portfolio (x). The intern selected a simple random sample of 8
client portfolios and determined the number of individual company stocks and the annual rate of
return earned by the client on his or her portfolio. The following sample data was obtained.
Number of Stocks (x ) 9 16 25 16 20 16 20 20
Rate of Return (y ) 1.3 1.6 2.1 1.8 1.8 1.9 1.5 1.7
(a) Use these data to develop the regression model. [6 marks]
(b) Show that SST = SSE + SSR. [6 marks]
(c) Calculate the adjusted R-squared. [3 marks]
(d) Conduct a hypothesis test to determine if the number of stocks has a statistically
significant effect on the rate of return. (Use α = 0.05). [5 marks]
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QUESTION TWO [15 MARKS]
The administrator of a school board in a large county was analyzing the average mathematics test
scores in the schools under her control. She noticed that there were dramatic differences in scores
among the schools. In an attempt to improve the scores of all the schools, she attempted to
determine the factors that account for the differences. Accordingly, she took a random sample of
40 schools across the county and, for each, determined the mean test score last year, the percentage
of teachers in each school who have at least one university degree in mathematics, the mean age,
and the mean annual income (in Sh.000s) of the mathematics teachers. A multiple regression was
run to predict test score on the three independent variables. The following partial output was
obtained.
(a) Finding the missing values A to J. [8 marks]
(b) At 5% level of significance, conduct a hypothesis test to determine whether the
overall model is statistically significant. [4 marks]
(c) At 5% level of significance, conduct a hypothesis test to determine if income has
a significant effect on test score. [3 marks]
QUESTION THREE [15 MARKS]
(a) Show how the exponential regression model y 0e1x (where 0 and 1 are constants) can
be transformed to an intrinsically linear regression model. [3 marks]
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(b) A consulting group offers courses in financial management for executives. At the end of these
courses’ participants are asked to provide overall ratings of the value of the course. For a
sample of 25 courses, the following regression was estimated by least squares:
where
ŷ = average rating by participants of the course.
x1 = percentage of course time spent in group discussion sessions.
x2 = money, in dollars, per course member spent on preparing course material.
x3 = money, in dollars, per course member spent on food and drinks.
x4 = dummy variable taking the value 1 if a visiting guest lecturer is brought in and 0
otherwise.
The numbers in parentheses under the coefficients are the estimated coefficient standard errors.
(i) Interpret the estimated coefficient on x4 . [3 marks]
(ii) Test, against the alternative that it is positive, the null hypothesis that the true
coefficient on x4 is zero (0). [3 marks]
(iii) Interpret the coefficient of determination, and use it to test the null hypothesis that,
taken as a group, the four independent variables do not linearly influence the
dependent variable. [3 marks]
(iv) Find and interpret a 95% confidence interval for 2 . [3 marks]
QUESTION FOUR [15 MARKS]
(a) Explain why an error term is included in a regression model. [3 marks]
(b) The following data below provide the total number of shipments of core major household
appliances in Kenya from 2000 to 2007 (in millions).
Year 2000 2001 2002 2003 2004 2005 2006 2007
Time 1 2 3 4 5 6 7 8
Shipments 38.4 38.2 40.8 42.5 46.1 47.0 46.7 44.1
A regression model of Shipments on Time was obtained as follows:
Shipments = 37.371 + 1.245Time
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(i) Find the standard error of the model. [6 marks]
(ii) Test for positive autocorrelation using the Durbin-Watson statistic. [Note: D L =
0.76 and DU = 1.33]. [6 marks]
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