2.9 - Regression, Mulrivariate and Non-linear Methods

Question 1

Linear CAPM based Regression

Answer 1

Rit - Rf = ai + βi(Rmt - Rf) + eit

ai = regression intercept estimate for asset i, incremental performance of the asset relative to benchmark, or alpha

Question 2

T-statistic

Answer 2

• parameter estimate / standard Error
• 5% significance = 1.96 standard errors
• if parameter t-statistic is above 1.96 the parameter is statistically significant

Question 3

K-Factor Regression

Answer 3

Rit - Rf = ai + βi1(F1t) + βi2(F2t)+ ….