CFA Level I · CFA Level I Exam · Applications of Simple Linear Regression in Finance
An analyst's estimated regression of a fund's return on a benchmark's return has a slope of 0.9 and an intercept of 0.3%. The benchmark return in the next month is 2.0%. The fund's predicted return is closest to:
The predicted return equals the intercept plus slope times the benchmark return: 0.3% + 0.9 × 2.0% = 2.1%. Omitting the intercept gives 1.8%, and ignoring the slope gives 2.3%, so 2.1% is correct.
- A1.8%
- B2.1%Correct
- C2.3%
Explanation
Predicted Y = 0.3% + 0.9 × 2.0% = 0.3% + 1.8% = 2.1%. The 1.8% option omits the intercept, and 2.3% adds the intercept to the benchmark return of 2.0% without applying the slope.
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