Seminar 1

1. 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

2. 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

3. 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

4. The linear relationship between two variables (y and x) can be represented by the
equation y= ax + b. 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 gradient

(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 .

5. 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) 303

6. 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

7. 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

8. The estimated alpha (a^) and beta (b^) 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 (ut, uj)= 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

Seminar 2
3. Suppose you have calculated the following regression results: yˆt= 1.25+ 0.64xt. The
standard errors of a^ and b^ 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 b statistically different from zero?

(a)* 1.10

(b) 0.91

(c) -0.62

(d) Cannot say without more information

4. In a time series regression of the excess return of a mutual fund on a constant

and the excess return on a market index, which of the following statements should
be true for the fund manager to be considered to have “beaten the market” in a
statistical sense?

(a) * The estimate for a should be positive and statistically significant

(b) The estimate for a should be positive and statistically significantly greater than the
risk-free rate of return

(c) The estimate for b should be positive and statistically significant

(d) The estimate for b should be negative and statistically significant

6. 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.

Seminar 3

1. The type I error associated with testing a hypothesis is equal to

(a) One minus the type II error

(b) The confidence level

(c) * The size of the test

(d) The size of the sample

2. Which of the following is NOT correct with regard to 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

3. Two researchers have identical models, data, coefficients and standard error estimates.
They test the same hypothesis using a two-sided alternative, but researcher 1 uses a 5% size
of test while researcher 2 uses a 10% test. Which one of the following statements is correct?
(a) Researcher 2 will use a larger critical value from the t-tables

(b) * Researcher 2 will have a higher probability of type I error

(c) Researcher 1 will be more likely to reject the null hypothesis

(d) Both researchers will always reach the same conclusion.

4. Consider an increase in the size of the test used to examine a hypothesis from 5% to 10%.
Which one of the following would be an implication?

(a) * The probability of a Type I error is increased

(b) The probability of a Type II error is increased

(c) The rejection criterion has become more strict

(d) The null hypothesis will be rejected less often.

5. Consider a standard normally distributed variable, a t-distributed variable with d degrees

of freedom, and an F-distributed variable with (1, d) degrees of freedom. Which of the
following statements is FALSE?

(a) The standard normal is a special case of the t-distribution, the square of which is a special
case of the F-distribution.

(b) * Since the three distributions are related, the 5% critical values from each will be
the same.

(c) Asymptotically, a given test conducted using any of the three distributions will lead to
the same conclusion.

(d) The normal and t- distributions are symmetric about zero while the F- takes only positive
values. Question 6 refers to the following regression estimated on 64 observations: yt = 1
+ 2X2t + 3X3t + 4X4t + ut

6. Which of the following null hypotheses could we test using an F-test?

i) b= 2

(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

7. 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.

8. 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.

9. 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 is mean have 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)

1. 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

3. 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

4. If a regression equation contains an irrelevant variable, the parameter estimates will be

(a) * Consistent and unbiased but inefficient

(b) Consistent and asymptotically efficient but biased

(c) Inconsistent

(d) Consistent, unbiased and efficient

5. The assumption of homoscedasticity can be written mathematically as

(a var (ut) = s^2 <oo

Seminar 6

1. Which of the following are consequences of using non-stationary data in regressions?

(I) Shocks will be persistent

(II) It can lead to spurious regressions

(III) t-ratios will not follow a t-distribution

(IV) F-Statistic will not follow an F-distribution

(a) I only

(b) I and II only

(c) I, II and III only

(d)* I, II, III and IV

2. To induce stationarity in a deterministic trend-stationary process

(a)* Regress the non-stationary series on the time trend and use the residuals

(b) Difference the series once

(c) Difference the series twice

(d) No action is necessary because the process is already stationary

(a) Stationary process

(b)* Deterministic trend process

(c) White noise prices

(d) Random walk with drift

4. A researcher would like to test for a unit root in a series. She runs the regression Dyt =
ψyt-1 + ut. What should her null hypothesis be assuming that she adopts the Dickey-Fuller
test approach?

(a) ψ=0

(b) ψ= 1

(c) ψ =/ 0

(d) ψ =/ 1

5. Assume the researcher in question 19 would like to run an augmented Dickey-Fuller test
instead. What is the appropriate regression she would have to run and the null hypothesis of
the test?
Seminar 7

1. Which of the following are consequences of using non-stationary data in

regressions?
(I) Shocks will be persistent
(II) It can lead to spurious regressions
(III) t-ratios will not follow a t-distribution
(IV) F-Statistic will not follow an F-distribution
(a) I only
(b) I and II only
(c) I, II and III only
(d) *I, II, III and IV

2. What are the names of the following models?

3. What is an appropriate approach to testing for ‘ARCH effects’?

(a)* Run a regression, collect the residuals, regress the squared residuals on their lags
and conduct a hypothesis test to check whether the coefficients of the lagged squared
residuals are equal to zero

(b) Run a regression, collect the fitted values, regress the fitted values on their squared
lags and conduct a hypothesis test to check whether the coefficients of the lagged
squared fitted values are equal to zero

(c) Employ White’s test

(d) All of the above

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