CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

A regression based on 15 observations was estimated as given below:

RStock = 0.0005 + 0.98 RIndex

Based on the regression results, a 1% change in the index return will result in,
A. 1.03% change in the stock return.
B. 9.8% change in the stock return.
C. 0.98% change in the stock return.
Explanation: The co-efficient of the dependent variable determines the sensitivity of the dependent variable to the independent variable. In this case, if the return on the index changes by 1%, the return on the stock would change by 0.98% (= 0.98 x 1%).

User Contributed Comments 5

User Comment
eddeb Don't get caught with the linear regression. Its the co-efficient that dertermines the sensitivity of the dependent variable
steved333 y=mx+b, baby! .98 is m! (gotta love pre-algebra)
Paulvw Careful with this one! While the intention is clear, the question has no answer. If for example, the return on the index is .0001 before changing, a 1% change in the index will change the stock return from 0.000598 to 0.000599, a 0.16% change, not a 0.98% change.
ricardo152 Paulvw: your calculation is wrong due to rounding. Go with the formula, not specific numbers.
endurance Read carefully. The question ask for the change, not the return. So, we have to look at the response (b1) to changes in the independent, i.e. how will stock return change, when index changes. (0.98x.0.01) = 0.0098 => 0.98 percent
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