Suppose You Have 5-Year Annual Data on the Excess Returns

question 2

Multiple Choice

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 is the return on fund ABC, is the risk-free rate and is the return on the market index) :

-What is the most appropriate interpretation of the assumption concerning the regression disturbance terms?

• A) The errors are nonlinearly independent of one another
• B) The errors are linearly dependent of one another
• C) The covariance of the errors is constant and finite over all its values
• D) The errors are linearly independent of one another

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Definitions:

Independent Directors

Board members who do not have a material or pecuniary relationship with the company or its related parties, except for board compensation, ensuring unbiased and objective decisions.

Audit Committees

A subgroup of a company's board of directors responsible for overseeing financial reporting and disclosure.

Profit Maximization

The process by which a firm determines the price and output level that returns the greatest profit.

Deontological Theory

A moral philosophy that emphasizes the importance of duty and the inherent morality of actions, rather than outcomes or consequences.