Skip to content

FRM Part I · FRM Exam Part I · Regression with Multiple Explanatory Variables

A regression of portfolio return on market excess return uses a dummy D (1 after a regulatory change, 0 before) and an interaction D*Mkt: R = 0.20 + 0.80*Mkt + 0.10*D + 0.25*D*Mkt + e. What are the intercept and the market beta after the regulatory change?

After the change the intercept is 0.30 and the beta is 1.05. Setting D equal to 1 adds the dummy coefficient to the intercept (0.20+0.10) and the interaction coefficient to the slope (0.80+0.25).

  1. AIntercept 0.30; beta 1.05Correct
  2. BIntercept 0.10; beta 0.25
  3. CIntercept 0.30; beta 0.80
  4. DIntercept 0.20; beta 1.05

Explanation

After the change D=1, so the intercept is 0.20+0.10=0.30 and the slope is 0.80+0.25=1.05. Option with beta 0.80 ignores the interaction term; option with intercept 0.20 ignores the dummy shift.

Did you get it right without looking?

One question tells you little. A timed set on Regression with Multiple Explanatory Variables shows your real accuracy, how long you take and where you lose marks.

Practise Regression with Multiple Explanatory VariablesFree diagnostic mock

More Regression with Multiple Explanatory Variables questions