Financial Risk Manager Part 1
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An economic researcher at a financial institution is designing a model that forecasts macroeconomic variables. The researcher considers applying regularization techniques such as the ridge regression approach, least absolute shrinkage and selection operator (LASSO) approach, or the elastic net approach to address the difficulty of estimating parameters in models that include multiple variables. After considering these three approaches, the researcher decides on using the elastic net. Which of the following statements about the use of an elastic net is correct?
A
Unlike the ridge regression approach, the elastic net approach introduces a penalty term in the loss function comprised of the sum of squares of the regression coefficients.
B
Unlike the LASSO approach, the elastic net approach introduces a penalty term in the loss function comprised of the sum of the absolute values of the regression coefficients.
C
The elastic net approach minimizes a loss function that contains both squared and absolute value functions of the parameters.
D
The elastic net approach manages correlated variables by assigning large positive coefficients to some variables and large negative coefficients to others.