Financial Risk Manager Part 1
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You have been given the following regression equation:
WPO = -3.2% + 0.49(S&P 500)
Calculate the predicted value of WPO excess returns if forecasted S&P 500 excess returns are 10%.
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NNikitesh
A
0.017
B
0.12
C
0.17
D
0.0017
Explanation:
Explanation
The regression equation is: WPO = -3.2% + 0.49 × (S&P 500)
Given forecasted S&P 500 excess returns = 10% = 0.10
Calculation: WPO = -3.2% + 0.49 × 10% = -3.2% + 4.9% = 1.7%
Convert 1.7% to decimal: 1.7% = 0.017
Verification:
- -3.2% = -0.032
- 0.49 × 0.10 = 0.049
- Sum = -0.032 + 0.049 = 0.017
Therefore, the predicted value of WPO excess returns is 0.017 (option A).
Why other options are incorrect:
- B (0.12): This would be 12%, which is too high
- C (0.17): This would be 17%, which is incorrect
- D (0.0017): This would be 0.17%, which is too low
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