CFA Level I · CFA Level I Exam · Applications of Simple Linear Regression in Finance
In a simple linear regression of a stock's monthly excess returns on the market's monthly excess returns, the independent variable is most likely:
The market's excess return is the independent variable. It is the explanatory variable used to predict the stock's excess return, which is the dependent variable. The residual is the unexplained portion of the dependent variable and is not an explanatory variable in the model.
- Athe regression residual
- Bthe market's excess returnCorrect
- Cthe stock's excess return
Explanation
The independent variable is the explanatory variable that is used to predict the dependent variable. The stock's excess return is being explained, so it is the dependent variable. The residual is the unexplained part of the dependent variable, not an independent variable.
Did you get it right without looking?
One question tells you little. A timed set on Applications of Simple Linear Regression in Finance shows your real accuracy, how long you take and where you lose marks.
More Applications of Simple Linear Regression in Finance questions
- A log-log regression of the quantity of a fund's units demanded on the fund's fee level gives ln(Quantity) = 5.2 − 1.4 × ln(Fee). Holding ot…
- An analyst fits a log-lin trend model to quarterly sales: ln(Sales) = 4.60 + 0.025 × t, where t = 1 for the first quarter of the sample. Sal…
- In a simple linear regression, an analyst increases the sample size while the estimated slope stays the same and the variability of the resi…
- An analyst regresses a stock's excess returns on market excess returns using 60 monthly observations. The estimated slope coefficient is 1.2…
- An analyst builds a prediction interval for a dependent variable using a simple linear regression. Holding the confidence level and the esti…
- In a simple linear regression of a stock's excess returns on the market's excess returns, the sum of squares total (SST) is 80 and the sum o…