In an attempt to "time the market," a financial analyst studies the quarterly returns of a stock. He uses the model y = β0 + β1 d1 + β2d2 + β3d3 + ε where y is the quarterly return of a stock, d1 is a dummy variable that equals 1 if quarter 1 an d0 otherwise, d2 is a dummy variable that equals 1 if quarter 2 and 0 otherwise, and d3 is a dummy variable that equals 1 if quarter 3 and 0 otherwise. The following table is a portion of the regression results.
a. Given that there are four quarters in a year, why doesn't the analyst include a fourth dummy variable in his model?
b. At the 5% significance level, are the dummy variables individually significant? Explain. Is the analyst able to obtain higher returns depending on the quarter?