week 11

In the example given, how might a factor affect firms differently?

• no correct answer

• It affects small firms more than large firms

• It affects all firms equally

• It has no effect on any firm

What kind of relationship can lead to standard regression giving misleading estimates?

• Linear relationship

• Constant variance relationship

• Non-linear relationship (e.g., ∩-shaped)

• Positive monotonic relationship

What has driven the use of quantile regression in finance?

• A decline in computational costs

• The need to simplify volatility models

• Increased interest in modeling tail behavior

• Regulations requiring it for risk reporting

What does the OLS estimator minimize to estimate the mean?

• The median of residuals

• The sum of squared residuals

• The sum of absolute residuals

• The variance of the dependent variable

How does quantile regression differ from OLS and median regression?

• It uses only squared residuals

• It applies non-linear transformation to residuals

• It minimizes a weighted sum of absolute residuals

• It requires the dependent variable to be normally distributed

What might someone mistakenly consider as an alternative to quantile regression?

• Using only time-series data

• Partitioning the data and running separate regressions on each subset

• Averaging all quantiles

• Applying OLS with weighted errors

What is one theoretical motivation behind using event studies in financial research?

• To test the firm’s profitability

• To evaluate debt issuance outcomes

• To test market efficiency

• To compare P/E ratios across sectors

What are the two main steps in testing the CAPM model?

• Estimating risk-free rate and inflation rate

• Estimating betas and testing the model

• Comparing average returns and variances

• Running a logistic and linear regression

How is the CAPM beta estimated in the Fama-MacBeth method?

• Using a single cross-sectional regression

• From a single regression over the entire sample

• Using five years of data with a rolling window

• Using only the latest market return

What is the key assumption behind the Fama-French methodology?

• Market risk explains all stock returns

• Only macroeconomic variables influence returns

• Market risk alone is not enough to explain the variation in stock returns

• All stock returns are random and unpredictable