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Financial Risk Manager Part 1

Financial Risk Manager Part 1

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A risk manager is testing a portfolio for heteroskedasticity using the White test. The portfolio is modeled as follows:

Yi=α+βX1i+ϵiY_i = \alpha + \beta X_{1i} + \epsilon_iYi​=α+βX1i​+ϵi​

The residuals are computed as follows:

ϵ^i=Yi−α^−β^X1i\hat{\epsilon}_i = Y_i - \hat{\alpha} - \hat{\beta}X_{1i}ϵ^i​=Yi​−α^−β^​X1i​

Which of the following correctly depicts the second step in the White test for the portfolio?

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