Consider the following regression. It models stock A’s return on day t as a line
ID: 3270797 • Letter: C
Question
Consider the following regression. It models stock A’s return on day t as a linear function of A’s return on day t-1.
RA,t = a + bRA,t-1 + et
If markets are weak-form efficient, then estimated parameter, b
a) will not be significantly different from 0.
b) will not be significantly different from 1.
c) must be significantly different from 0.
d) will be equal to the average value for RA,t
. A summary of regression analysis for fund X using Fama French factors provides the following results:
Below are three statements about the result above:
I. Fund X is clearly a small cap fund.
II. Fund X is clearly a value fund.
III. Fund X’s Fama-French alpha indicates superior performance.
Choose the correct statement below:
a) Only statement II is correct.
b) Only statements II and III are correct.
c) Statements I, II and III are correct.
d) None of the three statements are correct.
If we evaluate the relationship between a mutual fund’s assets under management (AUM) and returns, for a broad sample of U.S. equity funds, we may include additional independent variables, typically referred to as control variables. In our study, we might include such variables as the average market cap of stocks held, the turnover rate, and the fund’s expense ratio. The reason control variables are included is
a) to increase the R-squared of the regression.
b) to account for variables we expect to influence fund returns in a systematic way.
c) to avoid multicolinearity.
d) to add noise to the analysis.
Explanation / Answer
If markets are weak form efficient then estimated parameter b will not be significantally different from 0.
The provided three statment about given result indicate that.
Only statment two and three are correct i. e. fund x is clearly a value fund and fund x fama-french alpha indicates supirior performance.
The reason control variable included is to increase R - squared of the regression.