FRM Part I · FRM Exam Part I · Linear Regression
An analyst regresses monthly excess returns of a fund (Y) on the excess returns of a market index (X) using 60 observations. The sample statistics are: covariance of X and Y = 0.0036, variance of X = 0.0024, mean of X = 0.5%, mean of Y = 0.9%. What is the OLS intercept estimate (in percent)?
The slope is covariance divided by variance, 1.5. The intercept equals the mean of Y minus slope times the mean of X, which is 0.9% minus 0.75%, giving 0.15%.
- A-0.15%Correct
- B0.15%
- C0.75%
- D1.65%
Explanation
Slope = 0.0036/0.0024 = 1.5. Intercept = mean Y - slope x mean X = 0.9% - 1.5 x 0.5% = 0.9% - 0.75% = 0.15%. Wait: 0.9 - 0.75 = 0.15, so the intercept is +0.15%.
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