- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 4. Introduction to Linear Regression
- Subject 6. The predicted value of the dependent variable

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**CFA Practice Question**

An empirical finance professor estimates the following regression between the return on a stock, R, and the return on S&P 500 index, Rsp:

R = 5% + 1.1 Rsp + error term

If the regression R-square is 0.25, estimate the change in the return on the stock when the return on the S&P 500 index changes from 12% to 15%.

A. 3.3%

B. 8.8%

C. 18.2%

**Explanation:**With the given regression, the change in the return on the stock when the return on the S&P 500 index changes by one unit equals the slope coefficient, 1.1. Hence, when the return on the S&P 500 index changes by 3% from 12% to 15%, the return on the stock will change by 1.1*3% = 3.3%

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**User Contributed Comments**
2

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

seele |
It's asking for absolute change, not % change! |

sg2006 |
its asking for the change in returns not the return |