2.
Data obtained from the Hong Kong (Hang Seng) Stock Exchange over a periodcovering the 8th February 2002 to the 28th November 2005provide 200 weekly observations on a single stock (Cathay Pacific Airways) andthe overall Hang Seng Index. The following bivariate regression model isestimated by OLS (with OLS standard errors in parentheses):
RSt
= –0.001 +0.87RPt + Ut





(0.002)
(0.086)
where:
RSt is the weekly return to the Cathay Pacific Airwaysstock at the end of week t;
RPt is the weekly return to overall Hang Seng Index atthe end of week t;
t=1,.................,200.

The following statistics and diagnostics were also computed for thisregression model:
Unadjusted-R2 = 0.407;
Standard error of the dependent variable=0.036;
Standard error of the regression=0.028;
RESET ~ X 1^2= 0.021;
First and Higher Order Breusch-Godfrey Serial Correlation Tests ~ X1^2= 0.013, ~ X4^2= 8.011, ~X8^2= 11.905.

(b)
Evaluate the diagnostics reported for the above regressionmodel.


(c)
Interpret the estimated coefficients for the regressionmodel.
On the basis of the reportedestimates, what type of stock is Cathay Pacific Airways?


(d)
What proportion of the risk to the Cathay Pacific Airways stockreturns represents specific (or non-systematic) risk in this case? What are theimplications of your finding?