CFA Level I · CFA Level I Exam · Applications of Simple Linear Regression in Finance
An analyst fits ln(Y) = 2.0 + 0.05X, with X in years. Using the fitted model, the predicted value of Y when X = 10 is closest to:
The predicted Y is about 12.18. The fitted log value is 2.0 + 0.05 × 10 = 2.5, and exponentiating gives e^2.5 = 12.18. Forgetting to convert back from the log scale would give 2.50 incorrectly.
- A2.50
- B7.39
- C12.18Correct
Explanation
ln(Y) = 2.0 + 0.05(10) = 2.5. Y = e^2.5 = 12.18. Option A stops at the log value. Option B is e^2, which ignores the slope term.
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