FRM Part I · FRM Exam Part I · Linear Regression
An analyst regresses a bond's yield change on the change in a benchmark yield and obtains a slope of 0.90 with a standard error of 0.06. She wants to test H0: slope = 1.00 against a two-sided alternative at the 5% level with critical value 2.00. Which statement is correct?
The t-statistic is (0.90 minus 1.00) divided by 0.06, or about -1.67. Its absolute value is less than the critical value of 2.00, so the analyst fails to reject the hypothesis that the slope equals 1.00.
- At = -1.67; fail to reject the nullCorrect
- Bt = -1.67; reject the null
- Ct = 15.0; reject the null
- Dt = -0.10; fail to reject the null
Explanation
t = (0.90 - 1.00)/0.06 = -1.67. Its absolute value is below 2.00, so the null is not rejected. The value 15.0 wrongly tests against zero instead of 1.00, and -0.10 is the numerator without dividing by the standard error.
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