Question: The file “Question 3 Data” contains two columns MacDonald and S&P Index which contain the monthly returns for MacDonald’s shares and also for the S&P 500 index.

Plot a graph illustrating the relationship between the monthly returns for MacDonald’s shares and the S&P 500 index. What is the strength of the relationship between the two returns?

Use the appropriate statistical method to fit a version of the market model relating returns on MacDonald’s shares to returns on the S&P 500 Index.

\[{{R}_{D}}={{\beta }_{0}}+{{\beta }_{1}}{{R}_{M}}+\varepsilon \]

Where R_D denotes the return on MacDonald’s shares and R_M denotes the corresponding return on the market as indicated by the S&P 500 index.

What steps have you taken to ensure that the assumptions underlying the analysis are valid?

How much of the variability in returns on MacDonald’s shares is explained by the market model?