Leila Corporation Used the Following Regression Model to Determine If $\mu$

question 81

Multiple Choice

Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased: S_t = a₀ + a₁F_{t - 1} + $\mu$ _t,
Where S_t is the spot rate of the yen in year t and F_{t - 1} is the forward rate of the yen in year t-1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.

• A) overestimated
• B) underestimated
• C) correctly estimated
• D) none of the above

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