- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 7. Introduction to Linear Regression
- Subject 6. Prediction Using Simple Linear Regression and Prediction Intervals
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%
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 |