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5. The method of estimating econometric models which involves fitting a line to the
data by minimising the sum of squared residuals is the
(a)* Method of ordinary least squares
(b) Method of moments
(c) Method of generalised squared moments
(d) Method of maximum likelihood.
6. Suppose you have 5-year annual data on the excess returns on a fund manager’s
portfolio (‘fund ABC’) and the excess returns on a market index (where rABC is the
return on fund ABC, rf is the risk-free rate and rM is the return on the market index):
Year t Excess return on fund ABC Excess return on market index
rABC ,t rf ,t rM ,t rf ,t
1 14.0 16.0
2 32.0 21.7
3 11.6 6.0
4 21.2 16.2
5 17.4 11.0
7. Given the data in Question 6, what is the estimated beta ( ̂ ) of Fund ABC?
(a) 3.1
(b) 2.1
(c)* 1.1
(d) None of the above.
8. Suppose that the unbiased estimator of the standard deviation of the disturbance (s)
is 5.1. What is the nearest value to the standard errors of the estimated CAPM alpha (
̂ ) of Fund ABC from Question 6?
(a) 3.5
(b) 4.5
(c) 5.5
(d)* 6.5.
9. The estimated alpha ( ̂ ) and beta ( ̂ ) of a rival fund, Fund DEF, are 2.3 and 3.1,
respectively. If the expected market risk premium is 12%, what would we expect the
excess return of Fund DEF to be?
(a)* 39.5%
(b) 30.7%
(c) 5.4%
(d) 64.8%.
11. The estimators ̂ and ̂ determined by OLS will be the Best Linear Unbiased
Estimators (BLUE) if which of the following assumptions hold?
(I) The errors have zero mean
(II) The variance of the errors is constant and finite over all values of the independent
variable(s)
(III) The errors are linearly independent of one another
(IV)There is no relationship between the error and corresponding independent
variables
(a) I and II only
(b) I, II and III only
(c) II, III and IV only
(d)* I, II, III, and IV.
13. Using the test of significance approach, what is the test statistic value of a
hypothesis to test whether the true value of statistically different from zero?
(a)* 1.10
(b) 0.91
(c) –0.62
(d) Cannot say without more information.
14. Assuming there are 1000 observations in your sample, what are the test statistic
and critical value of a two-sided hypothesis test of whether the true value of
statistically different from zero be given a 5% significance level?
(a)* 1.10 and 1.96, respectively
(b) 0.91 and 1.65, respectively
(c) –0.62 and 1.96, respectively
(d) Cannot say without more information.
15. Consider a bivariate regression model with coefficient standard errors calculated
using the usual formulae. Which of the following statements is/are correct regarding
the standard error estimator for the slope coefficient?
(i) It varies positively with the square root of the residual variance (s)
(ii) It varies positively with the spread of X about its mean value
(iii) It varies positively with the spread of X about zero
(iv) It varies positively with the sample size T
16. In a time-series regression of the excess return of a mutual fund on a constant and
the excess return on a market index, which of the following statements should be true
for the fund manager to be considered to have ‘beaten the market’ in a statistical
sense?
(a) * The estimate for should be positive and statistically significant
(b) The estimate for should be positive and statistically significantly greater than
the risk-free rate of return
(c) The estimate for should be positive and statistically significant
(d) The estimate for should be negative and statistically significant.
20. Which of the following statements is correct concerning the conditions required
for OLS to be a usable estimation technique?
(a) * The model must be linear in the parameters
(b) The model must be linear in the variables
(c) The model must be linear in the variables and the parameters
(d) The model must be linear in the residuals.
21. Which of the following is NOT a good reason for including a disturbance term in
a regression equation?
(a) It captures omitted determinants of the dependent variable
(b) * To allow for the non-zero mean of the dependent variable
(c) To allow for errors in the measurement of the dependent variable
(d) To allow for random influences on the dependent variable.
22. Which of the following is NOT correct with regard to the p-value attached to a test
statistic?
(a) * p-values can only be used for two-sided tests
(b) It is the marginal significance level where we would be indifferent between
rejecting and not rejecting the null hypothesis
(c) It is the exact significance level for the test
(d) Given the p-value, we can make inferences without referring to statistical tables.
23. Which one of the following is NOT an assumption of the classical linear
regression model?
(a) The explanatory variables are uncorrelated with the error terms.
(b) The disturbance terms have zero mean
(c) * The dependent variable is not correlated with the disturbance terms
(d) The disturbance terms are independent of one another.
24. Which of the following is the most accurate definition of the term ‘the OLS
estimator’?
(a) It comprises the numerical values obtained from OLS estimation
(b) * It is a formula that, when applied to the data, will yield the parameter estimates
(c) It is equivalent to the term ‘the OLS estimate’
(d) It is a collection of all of the data used to estimate a linear regression model.
25. Two researchers have identical models, data, coefficients and standard error
estimates. They test the same hypothesis using a two-sided alternative, but researcher
1 uses a 5% size of test while researcher 2 uses a 10% test. Which one of the
following statements is correct?
(a) Researcher 2 will use a larger critical value from the t-tables
(b) * Researcher 2 will have a higher probability of type I error
(c) Researcher 1 will be more likely to reject the null hypothesis
(d) Both researchers will always reach the same conclusion.
26. Consider an increase in the size of the test used to examine a hypothesis from 5%
to 10%. Which one of the following would be an implication?
(a) * The probability of a Type I error is increased
(b) The probability of a Type II error is increased
(c) The rejection criterion has become more strict
(d) The null hypothesis will be rejected less often.
27. What is the relationship, if any, between the normal and t-distributions?
(a) A t-distribution with zero degrees of freedom is a normal
(b) A t-distribution with one degree of freedom is a normal
(c) * A t-distribution with infinite degrees of freedom is a normal
(d) There is no relationship between the two distributions.