FRM Part I · FRM Exam Part I · Linear Regression
An analyst regresses monthly fund excess returns (in %) on a dummy variable D that equals 1 in months when the market return was negative and 0 otherwise: R = 0.80 − 2.50·D + e. What is the estimated average monthly excess return in months when the market return was negative?
The average is −1.70% per month. The intercept of 0.80% is the mean for the base group (D = 0), and the dummy coefficient of −2.50 shifts the mean when D = 1, giving 0.80 − 2.50 = −1.70%.
- A0.80%
- B−1.70%Correct
- C−2.50%
- D3.30%
Explanation
With D = 1 the fitted value is the intercept plus the dummy coefficient: 0.80 − 2.50 = −1.70%. The intercept alone (0.80%) is the average for D = 0, the base group. The coefficient −2.50 is only the difference between groups.
Did you get it right without looking?
One question tells you little. A timed set on Linear Regression shows your real accuracy, how long you take and where you lose marks.
More Linear Regression questions
- A multiple regression with 3 explanatory variables is estimated on 25 observations and has an R-squared of 0.60. What is the adjusted R-squa…
- In the simple linear regression Y = a + bX + e estimated by OLS, which condition is required for the OLS slope estimator to be unbiased?
- A risk analyst estimates a linear regression by OLS and later finds that the error variance changes with the level of an explanatory variabl…
- In a regression of 27 observations, the estimated slope is 0.60 and the test of H0: slope = 0 gives a t-statistic of 2.50. The two-sided 5% …
- In a multiple regression with two explanatory variables, the estimated slopes are b1 = 0.80 and b2 = 0.50. The standard errors are 0.20 and …
- Under the Gauss-Markov conditions, OLS is described as BLUE. What does the term 'best' mean in this context?