Multiple Choice Test Bank Questions – Chapter 1+2

1. The linear relationship between two variables (y and x) can be represented by the
equation y = a + bx . Which of the following statements is true?
(I) Parameter a is termed the intercept
(II) Parameter a is termed the slope
(III) Parameter b is termed the slope
(IV) Parameter b is termed the constant

(a) I and IV only

(b) I and III only.
(c) II and III only
(d) II and IV only

2. Assume that the relationship between a company’s stock price (y) and dividends paid
per share (x) is linear. If the slope of the equation is 0.50 and the intercept is 30, what would
be the expected stock price if the dividend paid was 3?
(a) 33
(b) 30.50
(c) 31.5.
(d) 30

3. Consider the following graphs.

(A) (B)
Which of the following statements is true?
(a) A is depicts a non-linear relationship between y and x
(b) B is depicts a linear relationship between y and x
(c) A and B depict linear and non-linear relationships between y and x, respectively.
(d) A and B depict non-linear and linear relationships between y and x, respectively

4. Which of the following statements is true about graph (A) above?

(a) The intercept of the graph is positive, and its slope is negative.
(b) The intercept of the graph is negative, and its slope is positive
(c) Both the intercept and slope of the graph are positive
(d) It is impossible to say anything about the intercept and slope without seeing the
mathematical equation

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5. Consider the following two graphs:

(A) (B)
Which of the following statements is true if A represents a normal distribution?
(I) The skewness of the distribution plot A is 0 and its kurtosis is 3
(II) The skewness of the distribution plot B is 0 and its kurtosis is 3
(III) The excess kurtosis of the distribution plot A is 3
(IV) The excess kurtosis of the distribution plot B is 0

(a) Both (I) and (III) are true

(b) Only (III) is true
(c) Only (I) is true.
(d) Both (I) and (IV) are true

6. Financial econometrics can best be described as

(a) The application of statistical techniques to problems in finance.
(b) The application of mathematical models to problems in economics
(c) The application of financial techniques to problems in economics
(d) None of the above

7. Which of the following is a serious problem encountered by applied econometricians in

economics?
(a) Small samples problems
(b) Measurement error
(c) Data revisions
(d) All the above.

8. Which of these is a characteristic of financial data?

(a) They are observed at much lower frequencies than macroeconomic data
(b) The number of observations is usually very small
(c) They are considered to be very noisy.
(d) It is easy to separate underlying trends from random and uninteresting features

9. Data that have been collected over a period of time on one or more variables is referred
to as
(a) Cross-sectional data
(b) Time-cross-sectional data
(c) Time-series data.
(d) Panel data

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10. Data that have been collected on one or more variables at a single point in time is
referred to as
(a) Cross-sectional data.
(b) Time-cross-sectional data
(c) Time series data
(d) Panel data
11. Data that have both time series and cross-sections is referred to as
(a) Cross-sectional data
(b) Time-cross-sectional data
(c) Time-series data
(d) Panel data.
12. An individual invested $106.40 in the stock market and the value of his investment two
years later is $138.22. What are the simple and continuously compounded returns on his
investment?
(a) 26% and 30%, respectively
(b) –29% and -34%, respectively
(c) 30% and 26%, respectively.
(d) 30% and 30%, respectively
13. An individual has $10000 capital to invest in the stock market. He invests 30% of his
capital in stock A, 25% in stock B and 45% in Stock C. What is the return on his portfolio
assuming that the simple returns on stocks A, B and C are 5%, 10% and 12%, respectively?
(a) 9.4%.
(b) 9.7%
(c) 9.3%
(d) 9%
14. The numerical score assigned to the credit rating of a bond is best described as what
type of number?
(a) Continuous
(b) Cardinal
(c) Ordinal.
(d) Nominal

15. Suppose that we wanted to sum the 2007 returns on ten shares to calculate the return
on a portfolio over that year. What method of calculating the individual stock returns would
enable us to do this?
(a) Simple.
(b) Continuously compounded
(c) Neither approach would allow us to do this validly
(d) Either approach could be used, and they would both give the same portfolio return

16. If we wish to compare the spread of two series with considerably different mean values,
which of the following measures would be the most appropriate?
(a) The semi-interquartile range
(b) The standard deviation

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(c) The range
(d) The coefficient of variation.

17. Which of the following statements is TRUE concerning the correlation between two
series?
(a) It is unit-free.
(b) It scales with the product of the units of the two series
(c) It scales with the ratio of the units of the two series
(d) It will take the value –1 if there is no association between the two series

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 Multiple Choice Test Bank Questions – Chapter 3

1. Regression is concerned with describing and evaluating the relationship between

(a) A dependent variable and regressands
(b) An independent variable and regressors
(c) A dependent variable and regressors.
(d) An effect variable and explained variables

2. What does a positive linear relationship between x and y in a simple regression imply?
(a) Increases in the independent variable are usually accompanied by increases in the
regressor
(b) The relationship between x and y cannot be explained by a straight line
(c) Decreases in the independent variable is usually accompanied by increases in the
regressors
(d) Increases in the regressor are usually accompanied by increases in the dependent
variable.
3. Which of these is NOT a reason for adding a disturbance term to a regression model
yt =  +  xt + ut ?
(a) Some determinants of the effect variable may be omitted from the model
(b) Some determinants of the effect variable may be unobservable
(c) Some determinants of the independent variable may be omitted from the model.
(d) There may be errors in the way that the dependent variable is measured which
cannot be modelled

4. The method of estimating econometric models which involves fitting a line to the
data by minimising the sum of squared residuals is the
(a) Method of ordinary least squares.
(b) Method of moments
(c) Method of generalised squared moments
(d) Method of maximum likelihood

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 rABC is the
return on fund ABC, rf is the risk-free rate and rM is the return on the market index):
Year t Excess return on fund ABC Excess return on market
rABC ,t − rf ,t index
rM ,t − rf ,t
1 14.0 16.0
2 32.0 21.7
3 11.6 6.0
4 21.2 16.2
5 17.4 11.0

5. What is the estimated beta ( ̂ ) of Fund ABC?

(a) 3.13
(b) 2.13
(c) 1.13.
(d) None of the above

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6. Given the data in Question 5, what is the estimated alpha ( ̂ ) for Fund ABC?
(a) 2.32
(b) 3.27.
(c) 4.39
(d) 5.33

7. Suppose that the unbiased estimator of the standard deviation of the disturbance (s)
is 5.1. What is the nearest value to the standard errors of the estimated CAPM alpha (
̂ ) of Fund ABC from Question 5?
(a) 3.44
(b) 4.54
(c) 5.55
(d) 6.47.

8. The estimated alpha ( ̂ ) and beta ( ̂ ) of a rival fund, Fund DEF, are 2.3 and 3.1,
respectively. If the expected market risk premium is 12%, what would we expect the
excess return of Fund DEF to be?
(a) 39.5%.
(b) 30.7%
(c) 5.4%
(d) 64.8%

9. What is the most appropriate interpretation of the assumption cov ( ui , u j ) = 0

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.

10. The estimators ̂ and ̂ determined by OLS will be the Best Linear Unbiased
Estimators (BLUE) if which of the following assumptions hold?
(I) The errors have zero mean
(II) The variance of the errors is constant and finite over all values of the independent
variable(s)
(III) The errors are linearly independent of one another
(IV)There is no relationship between the error and corresponding independent
variables.

(a) I and II only

(b) I, II and III only
(c) II, III and IV only
(d) I, II, III, and IV.

11. Standard errors

(a) Give us an idea of the deviation of the errors from their mean
(b) Measure the reliability of the independent variables
(c) Give us an idea of the precision of estimates of  and  .
(d) Measure the reliability of the dependent variables

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12. Suppose you have calculated the following regression results: yˆ t = 1.25 + 0.64 xt .
The standard errors of ̂ and ̂ are 1.22 and 0.58, respectively. Using the test of
significance approach, what is the test statistic value of a hypothesis to test whether the
true value of  statistically different from zero?
(a) 1.10.
(b) 0.91
(c) –0.62
(d) Cannot say without more information
13. Assuming there are 1000 observations in your sample, what are the test statistic and
critical value of a two-sided hypothesis test of whether the true value of  statistically
different from zero be given a 5% significance level?
(a) 1.10 and 1.96, respectively.
(b) 0.91 and 1.65, respectively
(c) –0.62 and 1.96, respectively
(d) Cannot say without more information
14. Which of the following is a correct interpretation of a ‘95% confidence interval’ for
a regression parameter?
(a) We are 95% sure that the interval contains the true value of the parameter.
(b) We are 95% sure that our estimate of the coefficient is correct
(c) We are 95% sure that the interval contains our estimate of the coefficient
(d) In repeated samples, we would derive the same estimate for the coefficient 95% of
the time
15. Which of the following statements is correct concerning the conditions required for
OLS to be a usable estimation technique?
(a) The model must be linear in the parameters.
(b) The model must be linear in the variables
(c) The model must be linear in the variables and the parameters
(d) The model must be linear in the residuals
16. Which of the following is NOT correct regarding the p-value attached to a test
statistic?
(a) p-values can only be used for two-sided tests.
(b) It is the marginal significance level where we would be indifferent between rejecting
and not rejecting the null hypothesis
(c) It is the exact significance level for the test
(d) Given the p-value, we can make inferences without referring to statistical tables
17. Which one of the following is NOT an assumption of the classical linear regression
model?
(a) The explanatory variables are uncorrelated with the error terms
(b) The disturbance terms have zero mean
(c) The dependent variable is not correlated with the disturbance terms.
(d) The disturbance terms are independent of one another
18. What is the relationship, if any, between the normal and t-distributions?
(a) A t-distribution with zero degrees of freedom is a normal
(b) A t-distribution with one degree of freedom is a normal
(c) A t-distribution with infinite degrees of freedom is a normal.
(d) There is no relationship between the two distributions

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 Multiple Choice Test Bank Questions – Chapter 4

1. If our regression equation is y = X + u, where we have T observations and k +1

regressors, what will be the dimension of ̂ using the standard matrix notation
(a) T  k
(b) T  1
(c) (k+1)  1.
(d) k  k

2. Suppose the following regression estimated on 64 observations:

yt = 1 + 2X2t + 3X3t + 4X4t + ut
Which of the following null hypotheses could we test using an F-test?
(i) 2 = 0
(ii) 2 = 1 and 3 + 4 = 1
(iii) 34 = 1
(iv) 2 -3 -4 = 1.
(a) (i) and (ii) only
(b) (ii) and (iv) only
(c) (i), (ii), (iii), and (iv)
(d) (i), (ii), and (iv) only.

3. Suppose the following data:

 1.3 2.1 − 1.4 − 1.6
( X ' X ) −1 =  2.1 0.8 1.9 ,( X ' y ) =  2.9 ,
− 1.4 1.9 3.4   0.8 
s 2 = 0.86, T = 103
The regression equation is yt = 1 + 2X2t + 3X3t + ut
Which of the following is the correct value for ̂ 1 ?
(a) 2.89.
(b) 1.30
(c) 0.84
(d) We cannot determine the value of ̂ 1 from the information given in the question.

4. What is the relationship, if any, between t-distributed and F-distributed random variables?
(a) A t-variate with z degrees of freedom is also an F(1, z)
(b) The square of a t-variate with z degrees of freedom is also an F(1, z).
(c) A t-variate with z degrees of freedom is also an F(z, 1)
(d) There is no relationship between the two distributions

5. Which one of the following statements must hold for EVERY CASE concerning the
residual sums of squares for the restricted and unrestricted regressions?
(a) URSS > RRSS
(b) URSS  RRSS
(c) RRSS > URSS
(d) RRSS  URSS.

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6. Which one of the following is the most appropriate as a definition of R2 in the context that
the term is usually used?
(a) It is the proportion of the total variability of y that is explained by the model
(b) It is the proportion of the total variability of y about its mean value that is explained by
the model.
(c) It is the correlation between the fitted values and the residuals
(d) It is the correlation between the fitted values and the mean
7. Suppose that the value of R2 for an estimated regression model is exactly one. Which of the
following are true?
(i) All of the data points must lie exactly on the line
(ii) All of the residuals must be zero
(iii) All of the variability of y about its mean has been explained by the model
(iv) The fitted line will be horizontal with respect to all of the explanatory variables.
(a) (ii) and (iv) only
(b) (i) and (iii) only
(c) (i), (ii), and (iii) only.
(d) (i), (ii), (iii), and (iv)
8. Which of the following are often considered disadvantages of the use of adjusted R2 as a
variable addition/variable deletion rule?
(i) Adjusted R2 always rises as more variables are added
(ii) Adjusted R2 often leads to large models with many marginally significant or
marginally insignificant variables
(iii) Adjusted R2 cannot be compared for models with different explanatory variables
(iv) Adjusted R2 cannot be compared for models with different explained variables.
(a) (ii) and (iv) only.
(b) (i) and (iii) only
(c) (i), (ii), and (iii) only
(d) (i), (ii), (iii), and (iv)
9. Which of these is a mathematical expression of the residual sum of squares?
(I) uˆ ' uˆ
(II) uˆ1uˆ2 ...uˆT 
(III) uˆ1 + uˆ2 + ... + uˆT

(a) I only.
(b) I and II only
(c) I and III only
(d) I, II and III

10. If you are interested in conducting a multiple hypotheses test to determine whether  2
and  3 are both unity for a regression y = 1 +  2 x2 +  3 x3 +  4 x4 + u , what would the
restricted regression be?
(a) y = 1 +  4 x4 + u
(b) ( y − x2 ) = 1 +  2 + 3 x3 +  4 x4 + u
(c) ( y − x2 − x3 ) = 1 +  4 x4 + u .
(d) ( y − x4 ) = 1 +  2 x2 + 3 x3 + u

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11. What would the restricted regression be if you are interested in testing the null hypothesis
H 0 :  2 = 0 and 3 = 0 against the alternative hypothesis H1 :  2  0 or 3  0 for a
regression y = 1 +  2 x2 +  3 x3 +  4 x4 + u ,?
(a) y = 1 +  4 x4 + u .
(b) ( y − x2 ) = 1 +  2 + 3 x3 +  4 x4 + u
(c) ( y − x2 − x3 ) = 1 +  4 x4 + u
(d) ( y − x4 ) = 1 +  2 x2 + 3 x3 + u

12. Assuming that the restricted sum of squares of the restricted regression in Question 11 is
436.1 and the unrestricted sum of squares is 397.2, what would the conclusion of the
hypothesis test be? (The significance level is 5%.), with T=64 and F(2,60) = 3.15.
(a) Reject the null hypothesis.
(b) Do not reject the null hypothesis
(c) Reject the alternative hypothesis
(d) Cannot say

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 Multiple Choice Test Bank Questions – Chapter 5

1. A researcher conducts a Breusch–Godfrey test for autocorrelation using 3 lags of the

residuals in the auxiliary regression. The original regression contained 5 regressors including
a constant term and was estimated using 105 observations. What is the critical value using a
5% significance level for the LM test based on Table K2?
(a) 1.99
(b) 2.70
(c) 7.81
(d) 8.56

2. Which of the following would NOT be a potential remedy for the problem of
multicollinearity between regressors?
(a) Removing one of the explanatory variables
(b) Transforming the data into logarithms
(c) Transforming two of the explanatory variables into ratios
(d) Collecting higher frequency data on all of the variables

3. Which of the following conditions must be fulfilled for the Durbin–Watson test to be valid?
(i) The regression includes a constant term
(ii) The regressors are non-stochastic
(iii) There are no lags of the dependent variable in the regression
(iv) There are no lags of the independent variables in the regression.

(a) (i), (ii), and (iii) only

(b) (i) and (ii) only
(c) (i), (ii), (iii), and (iv)
(d) (i), (ii), and (iv) only

4. If the residuals of a regression on a large sample are found to be heteroscedastic which of

the following might be a likely consequence?
(i) The coefficient estimates are biased
(ii) The standard error estimates for the slope coefficients may be too small
(iii) Statistical inferences may be wrong

(a) (i) only

(b) (ii) and (iii) only
(c) (i), (ii), and (iii)
(d) (i) and (ii) only.

5. The value of the Durbin–Watson test statistic in a regression with 4 regressors (including the
constant term) estimated on 100 observations is 3.6. What might we suggest from this?
(a) The residuals are positively autocorrelated
(b) The residuals are negatively autocorrelated
(c) There is no autocorrelation in the residuals
(d) The test statistic has fallen in the intermediate region
6. If a residual series is negatively autocorrelated, which one of the following is the most likely
value of the Durbin–Watson statistic?
(a) Close to zero
(b) Close to two
(c) Close to four
(d) Close to one

7. Which one of the following is NOT a symptom of near multicollinearity?

(a) The R2 value is high
(b) The regression results change substantively when one particular variable is deleted
(c) Confidence intervals on parameter estimates are narrow
(d) Individual parameter estimates are insignificant

8. The assumption of homoscedasticity can be written mathematically as

(a) var ( ut ) =  2  
(b) var ( ut )   2  
(c) var ( ut )   2  
(d) var ( ut )   2  

9. Which of these is a test for heteroscedasticity?

(a) Breusch–Godfrey test
(b) White test
(c) Bera–Jarque test
(d) Breusch–Jagan test

10. Which of these is NOT a viable ‘solution’ for heteroscedasticity?

(a) Using generalised least squares if the form of heteroscedasticity is known
(b) Transforming the variables into logs
(c) Using heteroscedasticity-consistent standard error estimates
(d) Taking the first differences of the series

11. Assuming a researcher runs the following regression ut =  ut −1 + vt where ut is residual

from a regression. If the researcher conducts a hypothesis test with null hypothesis of
H 0 :  = 0 against an alternative hypothesis of H1 :   0 , what type of test is he or she
conducting?
(a) Test for heteroscedasticity
(b) Test for autocorrelation
(c) Test for non-normality
(d) Test for homoscedasticity
12. Assuming the researcher now runs the following regression
ut = 1ut −1 +  2ut −2 + ... +  r ut − r + vt where ut is residual from a regression. If the researcher
conducts a test with a null hypothesis of H 0 : 1 = 0 and  2 = 0 and ... and  r = 0 against an
alternative hypothesis of H1 : 1  0 or  2  0 or ... or  r  0 , what type of test is he or she
conducting?
(a) Test for rth order of heteroscedasticity
(b) Test for rth order of autocorrelation
(c) Test for rth order of non-normality
(d) Test for rth order of homoscedasticity

13. Which of these is not a consequence of ignoring autocorrelation if it is present?

(a) The coefficient estimates derived using OLS are inefficient
(b) Standard error estimates are inappropriate
(c) The coefficient estimates derived using OLS are biased
(d) The coefficient estimates derived using OLS are not the best linear unbiased estimators

14. Which of these is a viable solution to the problem of multicollinearity?

(I) Ignore it
(II) Drop one of the collinear variables
(III) Transform the highly correlated variables into a ratio
(IV) Take the logs of the variables

(a) I only
(b) II and III only
(c) I, II, and III only
(d) I, II, III, and IV
 Homework Review Mid-term Exam

Exercise 1

You are interested in estimating the CAPM for firm XYZ. The results of the estimation
of the CAPM 𝑅𝑋𝑌𝑍𝑡 = 𝛼 + 𝛽 × 𝑀𝑅𝑡 + 𝑢𝑡 model by Least Squares Method is:
Dependent Variable: RXYZ
Method: Least Squares
Sample: 9/02/2019 6/23/2020
Included observations: 212

Variable Coefficient Std. Error t-Statistic Prob.

C 0.000179 0.001044 ??????? 0.8637

MR ?????? 0.065586 ??????? 0.0000

R-squared Mean dependent var -9.10E-05

Adjusted R-squared 0.373146 S.D. dependent var 0.019188
S.E. of regression 0.015192 Akaike info criterion -5.526714
Sum squared resid Schwarz criterion -5.495048
Log likelihood 587.8317 Hannan-Quinn criter. -5.513915
F-statistic 126.6016 Durbin-Watson stat 2.213625
Prob(F-statistic) 0.000000

1. Write the fitted model.

2. If the market return is 1%, what is the value of the expected return of the firm XYZ.
3. Determine the Sum Squared of Residual (SSR)
4. Determine the value of the Goodness fit of the model
5. Determine the t-statistic of the parameter 𝛼.
6. Is the parameter 𝛼 significant at level 5%.
7. Determine the t-statistic of the parameter 𝛽
8. Is the parameter 𝛽 significant at level 5%.
9. Determine a confidence interval of size 95% for the parameter 𝛽.
10. 10. Test the hypothesis 𝜷 = 𝟏
11. Determine a confidence interval of size 95% for the parameter 𝛼.

1
Exercise 2

You are interested in estimating the CAPM for firm XYZ. The results of the estimation
of the CAPM 𝑅𝑋𝑌𝑍𝑡 = 𝛼 + 𝛽 × 𝑀𝑅𝑡 + 𝑢𝑡 model by Least Squares Method is:
Dependent Variable: RXYZ
Method: Least Squares
Date: 10/08/23 Time: 09:16
Sample: 9/02/2019 6/23/2020
Included observations: 212

Variable Coefficient Std. Error t-Statistic Prob.

C 0.000179 0.171922 0.8637

MR 0.737952 0.0000

R-squared 0.376117 Mean dependent var -9.10E-05

Adjusted R-squared 0.373146 S.D. dependent var 0.019188
S.E. of regression Akaike info criterion -5.526714
Sum squared resid 0.048467 Schwarz criterion -5.495048
Log likelihood 587.8317 Hannan-Quinn criter. -5.513915
F-statistic 126.6016 Durbin-Watson stat 2.213625
Prob(F-statistic) 0.000000

1. Write the fitted model.

2. If the market return increase by 1%, what is the value of variation in the expected
return of the firm XYZ.
3. Determine the standard Error of regression (SSE)
4. Determine the value of the Goodness fit of the model
5. Determine the standard error of the parameter 𝛼.
6. Is the parameter 𝛼 significant at level 5%.
7. Determine the t-statistic of the parameter 𝛽
8. Is the parameter 𝛽 significant at level 5%.
9. Test the null hypothesis 𝛽 = 1.
10. Determine a confidence interval of size 95% for the parameter 𝛽.

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 Homework Review Final-Exam
Exercise 1.
You are interested in estimating the CAPM for firm XYZ. The results of the estimation of the CAPM
𝐸𝑅𝑇𝑡 = 𝛼 + 𝛽 × 𝑀𝑅𝑇𝑡 + 𝑢𝑡 model by Least Squares Method using EViews software is:
Dependent Variable: ERT
Method: Least Squares
Date: 10/31/23 Time: 16:53
Sample: 2018M01 2023M08
Included observations: 68

Variable Coefficient Std. Error t-Statistic Prob.

C 0.013354 0.019212 ********* 0.4895

MRT 1.593211 0.366003 ********* 0.0000

R-squared 0.223060 Mean dependent var 0.026425

Adjusted R-squared 0.211288 S.D. dependent var 0.176198
S.E. of regression ******* Akaike info criterion -0.842801
Sum squared resid 1.616084 Schwarz criterion -0.777521
Log likelihood 30.65523 Hannan-Quinn criter. -0.816935
F-statistic 18.94861 Durbin-Watson stat 2.013864
Prob(F-statistic) 0.000048

Note. ERT and MRT refer to the excess equity returns and the excess market returns, respectively.

1. Write the fitted the model

…………………………………………………………………………………………………………
…………………………………………………………………………………………………………
…………………………………………………………………………………………………………
2. Calculate the t-statistic (𝛼)
…………………………………………………………………………………………………………
…………………………………………………………………………………………………………
…………………………………………………………………………………………………………
…………………………………………………………………………………………………………
3. Is the parameter 𝛼 is statistically significant at level 5%? Justify your answer.
…………………………………………………………………………………………………………
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4. Determine the t-statistic (𝛽)
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5. Is the parameter 𝛽 is statistically significant at level 5%? Justify your answer.
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6. Determine the 𝑅2 coefficient of determination and discuss the value of 𝑅 2 .
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7. Calculate the standard error of the regression (𝑆)
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[Link] a confidence interval for 𝛼 at confidence level 95%. ( 𝑍0.975 = 1.96)
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[Link] a confidence interval for 𝛽 at confidence level 95%. ( 𝑍0.975 = 1.96)
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10. Perform a test of the null hypothesis 𝛽 =1 at significance level 5% (𝑡0.975 = 1.997)
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Exercise 2.
We consider the following Arbitrage Price Theory (APT) model for the Saudi Basic Industries Corp
(2010) over the period from January 1st, 2018, to August 1st, 2023 (01/01/2018 to 01/08/2023). The
monthly data are:
1. ERT: the equity returns (%)
2. MRT: the TASI monthly returns (%)
3. DINDP: the growth rate of industrial production (%)
4. Dterm: the changes in 10-years bond yield (%)
5. Dtbills: the changes in 3-month treasury bills rates (%)
6. D(inflation): the changes in inflation rate (%)
7. DWTI= the growth rate of the oil prices (WTI is proxy of oil price).

We run the following regression:

𝑬𝑹𝑻𝒕 = 𝜷𝟎 + 𝜷𝟏 𝑴𝑹𝑻𝒕 + 𝜷𝟐 𝑫𝑰𝑵𝑫𝑷𝒕 + 𝜷𝟑 𝑫𝒕𝒆𝒓𝒎𝒕 + 𝜷𝟒 𝑫𝑻𝒃𝒊𝒍𝒍𝒕
+ 𝜷𝟓 𝑰𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏𝒕 +𝜷𝟔 𝑫𝑾𝑻𝑰𝒕 + 𝒖𝒕

The results of the estimation of the APT model by the Least squares method using EViews software are:
Dependent Variable: ERT
Method: Least Squares
Date: 11/01/23 Time: 15:57
Sample (adjusted): 2018M02 2023M08
Included observations: 67 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 0.016397 0.017448 0.939753 0.3511

MRT 1.545079 0.333920 4.627092 0.0000
DINDP 0.004593 0.004724 0.972260 0.3348
DTERM -0.001678 0.001498 -1.119767 0.2673
DTBILLS -0.001052 0.000817 -1.287539 0.2029
DINFLATION -0.075988 0.014570 -5.215584 0.0000
DWTI 0.001755 0.001554 1.129286 0.2633

R-squared 0.474220 Mean dependent var 0.026364

Adjusted R-squared 0.421642 S.D. dependent var 0.177527
S.E. of regression 0.135009 Akaike info criterion -1.068343
Sum squared resid 1.093647 Schwarz criterion -0.838001
Log likelihood 42.78947 Hannan-Quinn criter. -0.977196
F-statistic 9.019354 Durbin-Watson stat 1.537554
Prob(F-statistic) 0.000001

1. Write the fitted APT model

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2. Examine the individual significance of the parameters (which parameter(s) is (are) significant at
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3. Is the regression significant at 5%?
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4. Determine the coefficient of determination 𝑅2 and comment the result.
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5. Perform a test of the null hypothesis 𝛽2 = 1 at significance level 5% (𝑡0.975 = 1.996)
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6. Based on the results in Appendix 1, are you able to reject the null hypothesis of homoskedasticity
using the Breusch-Pagan-Godfrey test at level 5% (provide the value of the chi-square statistic)
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7. What is the appropriate method to deal with the autocorrelation of residuals issue?
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 Appendix 1
Heteroskedasticity Test: Breusch-Pagan-Godfrey
Null hypothesis: Homoskedasticity

F-statistic 1.702250 Prob. F(6,60) 0.1361

*********************** ********* Prob. Chi-Square(6) 0.1358
Scaled explained SS 25.65588 Prob. Chi-Square(6) 0.0003

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 11/01/23 Time: 16:12
Sample: 2018M02 2023M08
Included observations: 67

Variable Coefficient Std. Error t-Statistic Prob.

C 0.016777 0.005280 3.177311 0.0023

MRT 0.156264 0.101048 1.546440 0.1273
DINDP 0.002113 0.001430 1.478101 0.1446
DTERM -0.000103 0.000453 -0.227237 0.8210
DTBILLS -0.000338 0.000247 -1.367165 0.1767
DINFLATION -0.008012 0.004409 -1.817245 0.0742
DWTI 0.000674 0.000470 1.433176 0.1570

R-squared 0.145463 Mean dependent var 0.016323

Adjusted R-squared 0.060010 S.D. dependent var 0.042139
S.E. of regression 0.040855 Akaike info criterion -3.458960
Sum squared resid 0.100149 Schwarz criterion -3.228619

Appendix 2
Breusch-Godfrey Serial Correlation LM Test:
Null hypothesis: No serial correlation at up to 1 lag

F-statistic 3.495131 Prob. F(1,59) 0.0665

************ *********** Prob. Chi-Square(1) 0.0529

Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 11/01/23 Time: 16:24
Sample: 2018M02 2023M08
Included observations: 67
Presample missing value lagged residuals set to zero.

Variable Coefficient Std. Error t-Statistic Prob.

C 0.001762 0.017123 0.102930 0.9184

MRT -0.135063 0.335067 -0.403092 0.6883
DINDP 4.52E-05 0.004629 0.009754 0.9923
DTERM -0.000294 0.001477 -0.199009 0.8429
DTBILLS -7.57E-05 0.000802 -0.094368 0.9251
DINFLATION 0.006300 0.014668 0.429483 0.6691
DWTI 0.000368 0.001536 0.239638 0.8114
RESID(-1) 0.252587 0.135107 1.869527 0.0665

R-squared 0.055926 Mean dependent var 6.52E-18

Adjusted R-squared -0.056082 S.D. dependent var 0.128726