Question #53

of 139 Alex Wade, CFA, is analyzing the result of a regression analysis comparing the performance of gold stocks versus a broad equity market index. Wade believes that first lag serial correlation may be present and, in order to prove his theory, should use which of the following methods to detect its presence? A) The Breusch-Pagan test. B) The Hansen method. C) The Durbin-Watson statistic. Phillip Lee works for Song Bank as a quantitative analyst. He is currently working on a model to explain the returns (in %) of 20 hedge funds for the past year. He includes three independent variables: Market return = return on a broad-based stock index (in %) Closed = dummy variable (= 1 if the fund is closed to new investors; 0 otherwise) Prior period alpha = fund return for the prior 12 months – return on market (in %) Estimated model: hedge fund return = 3.2 + 0.22 market return + 1.65 closed – 0.11 prior period alpha Lee is concerned about the impact of outliers on the estimated regression model and collects the following information: Observation 1 2 3 4 5 6 7 8 9 10 Cook's D 0.332 0.219 0.115 0.212 0.376 0.232 0.001 0.001 0.233 0.389 Observation 11 12 13 14 15 16 17 18 19 20 Cook's D 0.089 0.112 0.001 0.001 0.219 0.001 0.112 0.044 0.517 0.212 Additionally, Lee wants to estimate the probability of a hedge fund closing to new investors, and he uses two variables: Fund size = log of assets under management Prior period alpha (defined earlier) Results are shown as follows: Variable Coefficient Intercept –3.76 Fund size –2.98 Prior period alpha –2.99