Chapter 9 - CAIA Flashcards - Regression, Multivariate, and Nonlinear Methods

Question 1

CAPM

Answer 1

The best-known single-factor market model is the capital asset pricing model (CAPM), which states that the expected return and realized return of an asset are linearly related to its market beta.

Question 2

Regression

Answer 2

A regression is a statistical analysis of the relationship that explains the values of a dependent variable as a function of the values of one or more independent variables based on a specified model.

Question 3

Dependent Variable

Answer 3

The dependent variable is the variable supplied by the researcher that is the focus of the analysis and is determined at least in part by other (independent or explanatory) variables.

Question 4

Independent Variable

Answer 4

Independent variables are those explanatory variables that are inputs to the regression and are viewed as causing the observed values of the dependent variable.

Question 5

Simple Linear Regression

Answer 5

A simple linear regression is a linear regression in which the model has only one independent variable.

Question 6

Slope Coefficient

Answer 6

The slope coefficient is a measure of the change in a dependent variable with respect to a change in an independent variable.

Question 7

Intercept

Answer 7

The intercept is the value of the dependent variable when all independent variables are zero.

Question 8

Ordinary Least Square Regression

Answer 8

Ordinary least squares regression, the most common regression procedure, selects the intercept and slope that minimize the sum of the squared values of the residuals (the values of eit).

Question 9

Advantages of OLS

Answer 9

The use of ordinary least squares has several advantages: It is quick and easy, and the slope coefficient that results has an intuitive interpretation.

Question 10

First Order Autocorrelation

Answer 10

First-order autocorrelation is a common phenomenon in alternative investments and is reasonably easy to address.

Question 11

Goodness of Fit

Answer 11

The goodness of fit of a regression is the extent to which the model appears to explain the variation in the dependent variable.

Question 12

R-Squared

Answer 12

The r-squared value of the regression, which is also called the coefficient of determination, is often used to assess goodness of fit, especially when comparing models.

Question 13

T-Test

Answer 13

A t-test is a statistical test that rejects or fails to reject a hypothesis by comparing a t-statistic to a critical value.

Question 14

Multiple Regression Model

Answer 14

A multiple regression model is a regression model with more than one independent variable.

Question 15

Multicollinearity

Answer 15

Multicollinearity is when two or more independent variables in a regression model have high correlation to each other. A primary method of detecting multicollinearity is to examine the correlations between the independent variables.

Question 16

Stepwise Regression

Answer 16

Stepwise regression is an iterative technique in which variables are added or deleted from the regression equation based on their statistical significance.

Question 17

Non Linear Exposure

Answer 17

A nonlinear exposure of a position to a market factor is when the sensitivity of the position’s value varies based on the magnitude of the level of change in the market factor’s value.

Question 18

Down Market Beta

Answer 18

The down market beta, bi,d, is the responsiveness of the fund’s return to the market return when the market return is less than the riskless rate (i.e., when the market’s excess return is negative, or down). The coefficient bi,diff is the difference between the sensitivities or betas of the fund’s return to up and down markets.

Question 19

Up Market Beta

Answer 19

The up market beta, bi,u, is the responsiveness of the fund’s return to the market return when the excess market return is positive, and is estimated as the sum of bi,d and bi,diff.

Question 20

Negative Conditional Correlation

Answer 20

When the correlation in the down sample is higher than the correlation in the up sample, it is termed negative conditional correlation.

Question 21

Positive Conditional Correlation

Answer 21

Positive conditional correlation of investment returns to market returns is when the correlation in the up sample is higher than the ​correlation in the down sample. Investors prefer investment strategies with positive conditional correlation, since the strategies offer higher participation in profits during bull markets and lower participation in losses during bear markets. The only indices exhibiting positive conditional correlation during this period were managed futures and equity market-neutral funds.

Question 22

Rolling Window Analysis

Answer 22

Rolling window analysis is a relatively advanced technique for analyzing statistical behavior over time, using overlapping subsamples that move evenly through time.

Question 23

Style Analysis

Answer 23

Style analysis is the process of understanding an investment strategy, especially using a statistical approach, based on grouping funds by their investment strategies or styles.

Question 24

Principal Component Analysis

Answer 24

Principal components analysis is a statistical technique that groups the observations in a large data set into smaller sets of similar types based on commonalities in the data.

Question 25

Look Back Option

Answer 25

A look-back option has a payoff that is based on the value of the underlying asset over a reference period rather than simply the value of the underlying asset at the option’s expiration date.