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. Data on annualized risk (y) and average credit rating (x) for 40 fictitious countries (based on the study results) are saved in the file. (The first and last five countries are shown in the table.)
a. Do the data provide sufficient evidence to conclude that country credit risk (x) contributes information for the prediction of market volatility (y)?
b. Use a graph to visually locate any unusual data points (outliers).
c. Eliminate the outlier(s), part b, from the data set and rerun the simple linear regression analysis. Note any dramatic changes in the results.
This question was answered on: Jul 11, 2017
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