You are a financial analyst at an investment firm. Your manager asks you to analyze the performance drivers for one of the firm’s portfolios. He asks you to construct a regression model of the portfolio’s monthly excess returns (RET) against three factors: the market excess return (MRKT), a size factor (SMB), and the monthly percentage change in a bond index (BOND).
You collect the data and run the regression, and the resulting model is:
YRET = -1.099 + 1.917XMRKT + 0.589XSMB + 0.047XBOND.
You then create some diagnostic charts to help determine the model fit.
0 of 5 Questions completed
You have already completed the quiz before. Hence you can not start it again.
Quiz is loading…
You must sign in or sign up to start the quiz.
You must first complete the following:
0 of 5 Questions answered correctly
Time has elapsed
You have reached 0 of 0 point(s), (0)
Earned Point(s): 0 of 0, (0)
0 Essay(s) Pending (Possible Point(s): 0)
“It’s not going to be easy, but it’s going to be worth it.”
What type of regression model should you use?
How should the coefficient of the bond index (XBOND) be interpreted?
What is the purpose of creating diagnostic charts?
What does it mean if the residuals do not appear to be homoskedastic?
What should you do if none of the independent variables are significant explanatory variables?
Why is the language of the Learning Outcome Statements (LOS) different from the curriculum?
The LOS are protected under the CFA Institute's copyright, and we don't have permission to duplicate them verbatim. Therefore, we've rephrased the LOS and included alphabetical labels (a, b, c, …) to simplify cross-referencing with the original LOS in the curriculum when needed.
Now available for all Level I topics! Try it now!
Enter a search term (e.g. ‘LIFO reserve’), or bookmark the glossary page!