An Analyst Has a Two-Factor Model to Forecast the Return

question 10

Multiple Choice

An analyst has a two-factor model to forecast the return for Security B: -2% + 4%(GDP) + 2.5%(IP) . You forecast GDP at 3% and IP at 2% with variances of 4% and 6% respectively. The covariance (GDP, IP) is .4, and the variance of Security B is 125. The variance of the random error term is

• A) 9.8%.
• B) 22.4%.
• C) 17.1%.
• D) 15.5%.

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Definitions:

Accuracy

The degree to which a measurement, calculation, or specification conforms to the correct value or standard.

Summary

A concise restatement of the main points or the essence of a longer piece of writing or speech.

Integrate

To combine two or more elements into a whole, or to become combined in this way.

Quotation

A formal statement of promise, typically in writing, offering to supply goods or services at a specified price.