
Regression
Measuring Risk: Montana Bank wants to determine the sensitivity of its stock returns to interest rate movements, based on the following information:
$\displaystyle \begin{matrix}
Quarter & Return on Stock & Return on Market & Interest Rate\\
1 & 2 & 3 & 6\\
2 & 2 & 2 & 7.5\\
3 & 1 & 2 & 9\\
4 & 0 & 1 & 8.2\\
5 & 2 & 1 & 7.3\\
6 & 3 & 4 & 8.1\end{matrix}$
$\displaystyle \begin{matrix}
Quarter & Return on Stock & Return on Market & Interest Rate\\
7 & 1 & 5 & 7.4\\
8 & 0 & 1 & 9.1\\
9 & 2 & 0 & 8.2\\
10 & 1 & 1 & 7.1\\
11 & 3 & 3 & 6.4\\
12 & 6 & 4 & 5.5
\end{matrix}$
Use a regression model in which Montana’s stock return is dependent on the stock market return and the interest rate. Determine the relationship between the interest rate and Montana’s stock return by assessing the regression coefficient applied to the interest rate. Is the sign of the coefficient (+) or ()? What does it suggest about the bank’s exposure to interest rate risk? Should Montana Bank be concerned about rising or declining interest rate movements in the future?
I know how to do regression but I am not sure on how to do this here.