A financial risk manager is tasked with assessing the sensitivity of a specific stock’s returns relative to changes in the S&P 500 Index, a common market benchmark. To achieve this, the risk manager employs a standard linear regression technique called ordinary least squares (OLS) regression analysis. The objective of utilizing this OLS method is to:

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Minimize the square of the sum of differences between the actual and estimated S&P 500 Index returns.

15.8%

Minimize the square of the sum of differences between the actual and estimated stock returns.

16.7%

Minimize the sum of differences between the actual and estimated squared S&P 500 Index returns.

14.0%

Minimize the sum of squared differences between the actual and estimated stock returns.

53.5%

Financial Risk Manager Part 1