III. Suppose we have the following fitted regression for the population of chief
ID: 1163242 • Letter: I
Question
III. Suppose we have the following fitted regression for the population of chief executive officers (CEOs), where salary is measured as annual salary (salary) in thousands of dollars, and roe denotes the average return on equity for the CEO's firm for the previous three years (Return on equity is defined in terms of net income as a percentage of common equity. For example, if roe 10, then average return on equity is 10%): salary 963.191 18.501 roe What is the dependent variable in this regression? What is the independent variable? What do the intercept 963.191 and the slope 18.501 mean? If the average return on equity for the CEO's firm for the previous three years is 30 percent, what is the CEO's estimated annual salary? (20 pointsExplanation / Answer
ANSWER:
The dependent variable is the average return on equity (ROE) for the CEO’s firm (%). The independent variable is annual salary. The intercept 963.191 means that the predicted salary is 963.191 for roe = 0. The slope 18.501 mean predicted change in salary as a function of the change in roe. CEO's estimated salary for a given value of roe equals $1518.221
Predicted salary = 963.191 + (18.501 * 30) = 1518.221