FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
A hedge fund's monthly returns are regressed on a single equity market factor. The regression gives an intercept of 0.30% per month and a beta of 0.50. The market return over the month is 2.00% and the fund's actual return is 1.60%. What is the residual (error) for that month?
The fitted return is 0.30% plus 0.5 times 2.00%, or 1.30%. The residual is actual minus fitted, 1.60% less 1.30%, which equals +0.30%.
- A0.30%
- B-0.30%Correct
- C-0.70%
- D0.60%
Explanation
Predicted return = 0.30% + 0.50 x 2.00% = 1.30%. Residual = actual 1.60% - predicted 1.30% = +0.30%. Wait: the residual is actual minus fitted, so it equals +0.30%, which is the intercept-excluded noise; note this is positive.
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