Table 5-15 gives data on the annual rate of return Y (%) on A future mutual fund and a return on a market portfolio as represented by the Fisher Index, X (%). Now consider the following model, which is known in the finance literature as the characteristic line.
Yt = B1 + B2Xi + ui
ANNUAL RATES OF RETURN (%) ON AFUTURE FUND (V)
AND ON THE FISHER INDEX (X), 1971-1980
In the literature there is no consensus about the prior value of B1. Some studies have shown it to be positive and statistically significant and some have shown it to be statistically insignificant. In the latter case, Model (1) becomes a regression-through-the-origin model, which can be written as
Yt = B2Xt + ut(2)
Using the data given in Table 5-15, to estimate both these models and decide which model fits the data better.