Mutual fund flows. As the nature of investing shifted in the 1990s (more day traders and faster flow of information using technology), the relationship between mutual fund monthly performance (Return) in percent and money flowing (Flow) into mutual funds ($ million) shifted. Using only the values for the 1990s (we’ll examine later years in later chapters), answer the following questions. (You may assume that the assumptions and conditions for regression are met.) The least squares linear regression is:

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(a) Interpret the intercept in the linear model.

(b) Interpret the slope in the linear model.

(c) What is the predicted fund Flow for a month that had a market Return of 0%?

(d) If during this month, the recorded fund Flow was $5 billion, what is the residual using this linear model? Did the model provide an underestimate or overestimate for this month?


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