You Have a Two-Factor Model to Forecast the Return for Security

question 46

Multiple Choice

You have a two-factor model to forecast the return for Security A: 4% + l.5(GDP) - 2(CPI) . You forecast GDP at 4% and CPI at 3% with variances of 6% and 5% respectively. The covariance (GDP, CPI) is .8 and the variance of the random error is 9%. The variance for Security A would be

• A) 47.3.
• B) 37.7.
• C) 52.4.
• D) 38.3.

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Definitions:

Representativeness Heuristic

A cognitive shortcut that involves judging the likelihood of an event by comparing it to an existing prototype that comes to mind, often leading to errors in decision making.

Availability Bias

A cognitive bias where individuals overestimate the importance of information readily available to them.

Hard-Charging Manager

A highly motivated and aggressive manager who pushes themselves and their team towards achieving goals.

Endowment Effect

A cognitive bias where people ascribe more value to things merely because they own them.