1. Are assumptions made concerning the unobservable error terms (ut ) or about their sample count 1 answer below »

1. Are assumptions made concerning the unobservable error terms (ut ) or about their sample counterparts, the estimated residuals ( ˆut )?

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2. What pattern(s) would one like to see in a residual plot and why?

3. A researcher estimates the following model for stock market returns, but thinks that there may be a problem with it. By calculating the t-ratios, and considering their significance and by examining the value

of R2 or otherwise, suggest what the problem might be.

How might you go about solving the perceived problem?