FINAL EXAM QUESTIONS 2020
Theory - 20 questions
Week 1 Questions
Q1. If the explained sum of squares is 35 and the total sum of squares is 49, what is the
residual sum of squares?
A. 10
B. 14
C. 12
D. 18
Solution: B
Explanation: Total Sum of Squares = Explained Sum of Squares + Residual Sum of Squares
SST = SSE + SSR
SSR = SST – SSE = 49 – 35 = 14
Week 2 Questions
Q2. Consider a regression model predicting the amount someone has spent (on some
arbitrary product) based on their salary and age. To improve the model we have created an
interaction variable between Salary and Age. Assume salary given in dollars, and age in
years.
b0 = 500
b1 = 0.35
b2 = 0.12
b3=0.21
AmountSpent = b0 + b1Salary + b2Age + b3SalaryAge
How much more will a 30-year old person with a salary of $20,000 spend than a person who
is 2 years older and earns $5000 less than him/her?
a)17500
b)33249.54
c)26949.76
d)26950.24
Solution: (c) Week2 Lesson 4
DifInAmountSpent = b1 * (Dif in Salary) + b2*(Dif in Age) + b3* (Dif in (Salary*Age))
DifInAmountSpent = 0.35*(5000) +0.12*(-2) + 0.21 * (120,000) = 26949.76
Week 3 Questions
,Q3 Given the independent variable X and dependent variable Y, we regress Y on log(X) and
get the following formula: Y = b1 * log(X) + b0 where b1 and b0 are the
estimated coefficient and intercept respectively from OLS regression. How should we
interpret it?
A. As X increases by 1 unit, Y increases by b1 units
B. As X increases by 1%, Y increases by 0.01 b1 units
C. As X increases by 1 unit, Y increases by 100( e b −1 )%
1
D. As X increases by 1%, Y increases by 100( e 0.01 b −1 )%
1
Answer: B
As X increases by 1%, log(X) becomes log(X) + 0.01 and y_new = b1 *(log(X) + 0.01) +
b0 = y_old + 0.01 b1
Refer to Week 3 TA session notes
Week 4 Questions
Q4 Select the option from below which is TRUE regarding the False Positive Rate:
A). A model with high Specificity will have a high False Positive Rate.
B). A model with high Specificity will have a low False Positive Rate.
C). The False Positive Rate of a model is not dependent on the number of True
Negatives
D). The False Positive Rate is given by the formula: False Positive / (True Negatives +
True Positives)
Answer: Option B.
Lesson Slide: Page 26
False Positive Rate = 1 - Specificity
Week 5 Questions
Q5 What is the orthogonality assumption in OLS, taking Y = a + bX as the model, and error
term is e?
(A) Correlation(X, X) = 0
(B) Correlation(X, e) = 0
(C) Correlation(e, X) = 1
(D) None of the above
Ans: (B)
The orthogonality assumption in OLS is that the error terms and predictors are not related at
all.
(Week 5, Lesson 2)
Week 7 Questions
, Q6 A speculative fund manager wants to take advantage of a mispricing in the market,
where he sees a XYZ stock trading at $98.00 five minutes before the closing bell and decides
to buy the stock. However, his order cannot be placed in time and the market closes with the
XYZ stock price at $98.00. The next day once the market opens, he sees the best bid and
offer prices of the stock XYZ (in $) as follows:
What is the delay cost per share (in basis points) he will incur if he places a market order
immediately? (rounded to the closest integer)?
a) 102 bps
b) 153 bps
c) 51 bps
d) There is no delay cost and the order will get executed at $98
Solution: b)
If the speculator wants to buy a stock on a market order, it’ll be executed in the ask price,
which is $99.50. Hence, delay cost of (99.50-98) = $1.50. Basis points = (1.5/98) *10^4 =
153.06 bps
Q7 Marty had purchased the stock of ABC at $120 last year as ABC had announced a
promising new product. The current stock price of ABC is at $110 and after the latest
quarterly results the outlook for the stock Is not very good as the new product has failed to
generate the expected sales and the stock price is expected to fall to lower levels. Marty is
not willing to sell the stock as: 1) he does not want to book a loss and 2) in spite of the poor
sales report he still believes his initial research cannot go wrong and the price will increase.
Which behavioural biases is Marty exhibiting?
a) Anchoring and Recency effect
b) Recency effect and Anchoring
c) Loss Aversion and Overconfidence
d) Loss Aversion and Recency effect
Solution:
c) Loss aversion and Overconfidence – As Marty does not want to sell on a loss even when
the future prospects for the stock don’t look good, he is showing Loss aversion bias. As he is
overconfident of his initial research, he exhibits Overconfidence bias
Week 8 Questions
Q8 Which of the following statement is correct regarding the “factor regression”?
A) The coefficients on Mkt-rf; SMB; HML; MOM; BAB; and QMJ tell us about exposure to
the different factors
Theory - 20 questions
Week 1 Questions
Q1. If the explained sum of squares is 35 and the total sum of squares is 49, what is the
residual sum of squares?
A. 10
B. 14
C. 12
D. 18
Solution: B
Explanation: Total Sum of Squares = Explained Sum of Squares + Residual Sum of Squares
SST = SSE + SSR
SSR = SST – SSE = 49 – 35 = 14
Week 2 Questions
Q2. Consider a regression model predicting the amount someone has spent (on some
arbitrary product) based on their salary and age. To improve the model we have created an
interaction variable between Salary and Age. Assume salary given in dollars, and age in
years.
b0 = 500
b1 = 0.35
b2 = 0.12
b3=0.21
AmountSpent = b0 + b1Salary + b2Age + b3SalaryAge
How much more will a 30-year old person with a salary of $20,000 spend than a person who
is 2 years older and earns $5000 less than him/her?
a)17500
b)33249.54
c)26949.76
d)26950.24
Solution: (c) Week2 Lesson 4
DifInAmountSpent = b1 * (Dif in Salary) + b2*(Dif in Age) + b3* (Dif in (Salary*Age))
DifInAmountSpent = 0.35*(5000) +0.12*(-2) + 0.21 * (120,000) = 26949.76
Week 3 Questions
,Q3 Given the independent variable X and dependent variable Y, we regress Y on log(X) and
get the following formula: Y = b1 * log(X) + b0 where b1 and b0 are the
estimated coefficient and intercept respectively from OLS regression. How should we
interpret it?
A. As X increases by 1 unit, Y increases by b1 units
B. As X increases by 1%, Y increases by 0.01 b1 units
C. As X increases by 1 unit, Y increases by 100( e b −1 )%
1
D. As X increases by 1%, Y increases by 100( e 0.01 b −1 )%
1
Answer: B
As X increases by 1%, log(X) becomes log(X) + 0.01 and y_new = b1 *(log(X) + 0.01) +
b0 = y_old + 0.01 b1
Refer to Week 3 TA session notes
Week 4 Questions
Q4 Select the option from below which is TRUE regarding the False Positive Rate:
A). A model with high Specificity will have a high False Positive Rate.
B). A model with high Specificity will have a low False Positive Rate.
C). The False Positive Rate of a model is not dependent on the number of True
Negatives
D). The False Positive Rate is given by the formula: False Positive / (True Negatives +
True Positives)
Answer: Option B.
Lesson Slide: Page 26
False Positive Rate = 1 - Specificity
Week 5 Questions
Q5 What is the orthogonality assumption in OLS, taking Y = a + bX as the model, and error
term is e?
(A) Correlation(X, X) = 0
(B) Correlation(X, e) = 0
(C) Correlation(e, X) = 1
(D) None of the above
Ans: (B)
The orthogonality assumption in OLS is that the error terms and predictors are not related at
all.
(Week 5, Lesson 2)
Week 7 Questions
, Q6 A speculative fund manager wants to take advantage of a mispricing in the market,
where he sees a XYZ stock trading at $98.00 five minutes before the closing bell and decides
to buy the stock. However, his order cannot be placed in time and the market closes with the
XYZ stock price at $98.00. The next day once the market opens, he sees the best bid and
offer prices of the stock XYZ (in $) as follows:
What is the delay cost per share (in basis points) he will incur if he places a market order
immediately? (rounded to the closest integer)?
a) 102 bps
b) 153 bps
c) 51 bps
d) There is no delay cost and the order will get executed at $98
Solution: b)
If the speculator wants to buy a stock on a market order, it’ll be executed in the ask price,
which is $99.50. Hence, delay cost of (99.50-98) = $1.50. Basis points = (1.5/98) *10^4 =
153.06 bps
Q7 Marty had purchased the stock of ABC at $120 last year as ABC had announced a
promising new product. The current stock price of ABC is at $110 and after the latest
quarterly results the outlook for the stock Is not very good as the new product has failed to
generate the expected sales and the stock price is expected to fall to lower levels. Marty is
not willing to sell the stock as: 1) he does not want to book a loss and 2) in spite of the poor
sales report he still believes his initial research cannot go wrong and the price will increase.
Which behavioural biases is Marty exhibiting?
a) Anchoring and Recency effect
b) Recency effect and Anchoring
c) Loss Aversion and Overconfidence
d) Loss Aversion and Recency effect
Solution:
c) Loss aversion and Overconfidence – As Marty does not want to sell on a loss even when
the future prospects for the stock don’t look good, he is showing Loss aversion bias. As he is
overconfident of his initial research, he exhibits Overconfidence bias
Week 8 Questions
Q8 Which of the following statement is correct regarding the “factor regression”?
A) The coefficients on Mkt-rf; SMB; HML; MOM; BAB; and QMJ tell us about exposure to
the different factors
