Module 9.2 LOS 9.e: Testing AR models for improper specifications using t-tests
We cannot use DW tests to test for autocorrelation (serial correlation in an AR model). To identify autocorrelation we use …
CFA Level II
Module 9.2 LOS 9.f: Mean Reversion in Time Series
Some time series can exhibit a tendency to move towards its mean. The mean reverting level can be expressed as: …
Modules 8.6 – 8.9: Heteroskedasticity, Serial Correlation, Multicollinearity and Model Misspecification
Heteroskedasticity Heteroskedasticity occurs when the variance of the residuals is not constant across all observations. We are concerned with conditional …
Module 7.5 LOS 7.j: ANOVA Tables, R-squared (adjusted and unadjusted), SEE and F-tests
The R2 (adjusted vs unadjusted) The R2 value is the also called the coefficient of determination. It is a numerical …
Module 8.2 LOS 8.c/8.d: Hypothesis testing of regression coefficients with t-statistic and p-statistic
Coefficient values in multiple regressions are not informative on their own. To determine the significance of slope coefficients in multiple …
Module 8.6 LOS 8.f: Assumptions of a multiple or simple regression model
Multiple regression models operate under the following assumptions: A linear relationship exists between dependent and independent variables The independent variables …
Module 34.6 LOS 34.k: Modern Term Structure Theory Differences
Structural Model Structural models of credit risk are based on issuer balance sheets and option pricing theory. The oft-given analogy …
CFA Level II: Derivatives – Option Strategies
A goal of derivative strategies is to modify portfolio risk and return. By combining a bond portfolio with a short …
Module 40.4 & 40.7 LOS 40.k, 40.i: Option Greeks, Synthetic Position, Delta Hedges, Hedge ratio arbitrage
Put-Call Parity and Synthetic Positions Put-call parity is the principle used to generate synthetic longs and shorts. The equation equates …
Module 27.1 – Equity Pricing Models (Ibbotsen-Chen, CAPM, Fama-French), Equity Risk Premiums & Beta Adjustments
Investors generally require a risk-premium in excess of the risk-free rate to justify holding equity securities. The risk premium in …