CFA Level I · CFA Level I Exam · Applications of Simple Linear Regression in Finance
An analyst regresses a stock's excess returns on market excess returns using 60 monthly observations. The estimated slope coefficient is 1.20 with a standard error of 0.40. To test whether the true slope equals 1.0, the analyst's test statistic is closest to:
The test statistic is 0.50. It equals the estimated slope of 1.20 minus the hypothesized value of 1.0, divided by the standard error of 0.40. Testing against zero instead of 1.0 would give 3.00, but the hypothesis stated is that the slope equals 1.0.
- A0.50Correct
- B2.50
- C3.00
Explanation
The test statistic is (estimated slope − hypothesized slope) / standard error = (1.20 − 1.00) / 0.40 = 0.50. Using 3.00 results from dividing the estimate by the standard error, which tests a slope of zero rather than 1.0.
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