- CFA Exams
- CFA Exam: Level II 2021
- Study Session 2. Quantitative Methods (1)
- Reading 4. Introduction to Linear Regression
- Subject 2. Interpreting a regression coefficient

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**CFA Practice Question**

Which of the following statements most accurately describes a situation in which the regression coefficient between a security and the market index is 0.4?

B. For every percent move in the market, the security's return is expected to change by 0.4%

C. The relationship between the two securities is positive, however, the degree to which they move in the same direction is not perfect.

D. This certainly implies that portfolio has a high degree of unsystematic risk.

A. Movements in the market explain 40% of the variation in the security's return.

B. For every percent move in the market, the security's return is expected to change by 0.4%

C. The relationship between the two securities is positive, however, the degree to which they move in the same direction is not perfect.

D. This certainly implies that portfolio has a high degree of unsystematic risk.

Correct Answer: B

Regression coefficient is really the slope of a regression equation.

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**User Contributed Comments**
7

User |
Comment |
---|---|

danlan2 |
Other choices are for correlation coefficient, not regression coefficient. |

xiajessy |
what is the difference of regression coefficient and correlation coefficient? under this situation in the question. |

vi2009 |
corr coefficient = measures how security & the market index moves ... base on the formula COV = p x Qsub security x Qsub market index regression coefficient is simply the slope of the regression model. |

Narsi |
Regression coefficient = Correlation coefficient x SD(y) / SD(x) |

tedolini |
regression coefficient = correlation coefficient x sd(y)/sd(x) |

ericczhang |
B is only really true of the regression equation is log-log... |

davidt876 |
@danlan2: option 'A' wouldn't apply for a correlation coefficient - but would apply for the correlation coefficient squared (coefficient of determination) |