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CFA Level I · CFA Level I Exam · Applications of Simple Linear Regression in Finance

A regression of a fund's returns on a benchmark's returns yields an intercept (alpha) of 0.9% with a t-statistic of 1.40. The critical t-value at the 5% significance level is 2.00. The most appropriate conclusion is that the:

The alpha is not significantly different from zero, so statistical evidence of outperformance is lacking. The t-statistic of 1.40 is smaller than the critical value of 2.00, so the null hypothesis of zero alpha is not rejected despite the positive 0.9% estimate.

  1. Aalpha is significantly different from zero, so the fund outperformed
  2. Balpha is not significantly different from zero, so outperformance is not statistically supportedCorrect
  3. Cfund's slope coefficient is equal to 1.0, so the fund tracks the benchmark exactly

Explanation

The t-statistic of 1.40 is below the critical value of 2.00 in absolute terms, so the null that alpha equals zero cannot be rejected. The positive point estimate is not statistically reliable evidence of outperformance. Nothing in the data addresses the slope.

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