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FRM Part I · FRM Exam Part I · Linear Regression

In a regression of fund return on a size-category dummy, the coefficient on the dummy for 'large fund' is 1.20 with a standard error of 0.40, using a large sample. Which interpretation is best at the 5% significance level (critical value about 1.96)?

The t-statistic is 1.20/0.40 = 3.0, above 1.96, so large funds' mean return differs significantly from the base group by about 1.20. A dummy coefficient measures a group mean difference, not a per-unit effect.

  1. AThe t-statistic is 0.33, so large funds do not differ from the base group
  2. BThe t-statistic is 3.0, so large funds' mean return differs significantly from the base group by about 1.20Correct
  3. CThe t-statistic is 3.0, so large funds' return rises 1.20 for each unit increase in size
  4. DThe t-statistic is 1.20, so the result is significant only at the 10% level

Explanation

t = 1.20/0.40 = 3.0, which exceeds 1.96, so the coefficient is significant. A dummy coefficient is a difference in means versus the base group, not a per-unit slope. The 0.33 figure inverts the ratio.

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