August 2025 Flashcards
(124 cards)
1
Q
What is the BP test to detect heteroskedasticity
A
BP = R^2 (of Regression not adjusted R) x n with k df
2
Q
What happens during serial correlation?
A
There are invalid coefficients and deflated standard errors and there are Type I errors
3
Q
What do we use to detect multicollinearity?
A
There are conflicting t- and F-statistics and high VIF
4
Q
SPE Rule for IFRS
A
Under IFRS, SPEs must be consolidated if they are conducted for the benefit of the sponsoring entity. Further, under IFRS, SPEs cannot be classified as qualifying.
5
Q
If equity method is chosen over Acquisition what will be higher?
A
Net Profit Margin, ROE, ROA
6
Q
If equity method is chosen over Acquisition what will be lower?
A
Sales, Expenses, Assets and Liabilities, SH Equity while NI is the same
7
Q
What is the df for Regression and errors
A
Regression - K
Error - n-k-1
8
Q
What is MSR
A
Mean Squared Regression - RSS/k
9
Q
What is MSE
A
Mean Squared Error - SSE/(n-k-1)
10
Q
What is SST
A
RSS + SSE
11
Q
What is R2
A
RSS/SST
12
Q
What is R2adj
A
1 - [ (n-1)/(n-k-1) x (1-R2)]
13
Q
What is the probability of a log equation?
A
P = 1/(1 + exp(-(b0+b1X1….+)))
14
Q
What is the Underwriting
Expense Ratio?
A
Underwriting expense/ net premiums written
15
Q
What is the combined ratio?
A
Loss Expense & Loss Adjustment Expense Ratio + Underwriting
Expense Ratio
16
Q
When you buy and sell protection with a CDS what does that mean about the underlying?
A
Buying protection - Underlying is worsening
Selling protection - Underlying is getting better
17
Q
what is the mean reverting level?
A
b0/(1 − b1)
18
Q
Assumptions of the multiple regression model
A
residuals are normally distributed and not correlated
The variance of the error terms is constant and no exact linear relationship among Xs
19
Q
What is the difference between AIC and BIC?
A
AIC is used if the goal is a better forecast, while BIC is used if the goal is a better goodness of fit
20
Q
How to test if multiple coefficients are significant
A
Use the F-stat where F = (SSEr - SSEu)/q SSEU/(n - k -1) where q is number of excluded variables in the restricted model and k is the number of independent variables
21
Q
What happens when there is an omission of an important variable?
A
They are biased and inconsistent regression parameters, and may lead to correlation or heteroskedasticity in the residual
22
Q
What happens when there is an inappropriate transformation?
A
It may lead to heteroskedasticity in the residual
23
Q
What happens when inappropriate variable scaling?
A
It leads to multicollinearity or heteroskedasticity in the residuals
24
Q
What happens when data is improprely pooled?
A
Lead to heteroskedaticity or serial correlation in the residuals
25
What are the effects of conditional heteroskedasticity?
There are too many Type I errors
26
How do you detect and correct for conditional heteroskedasticity?
You would detect using the BP chi-square test and then use robust or white-corrected standard errors
27
What is the effect of serial correlation?
Coefficients are consistent but the SE are underestimated and there are too many Type I errors
28
How do you detect and correct for serial correlation?
Detect using the BG F-test and then use robust or Newey-West corrected standard errors
29
What are the effects of multicollinearity?
The coefficients are consistent but unreliable. SEs are overestimated and too many Type II errors
30
How do you detect and correct for multicollinearity?
Conflicting t and F-statst and high VIF and you correct by dropping a correlated variable
31
What is the difference between outliers and high-leverage points
Outliers - extreme Y variables
High-leverage - extreme observations of the independent or X variable
32
What is a logistic function used for?
When the dependent variable is 1 or 0, the slope of the coefficients is interpreted as the change in the log odds of the event occurring per 1-unit change in the independent variable
33
What does it mean to be covariance stationary
When its mean, variance, and covariances with lagged and leading values do not change over time. Covariance stationarity is a requirement for using AR models
34
What happens when an AR model is incorrectly specified?
They will possess some degree of serial correlation
35
What is RMSE
Root Mean Squared error is used to compare the accuracy of AR models in forecasting out-of-sample values. We calculate the square RMSE, and the model with the lower RMSE will have a lower forecast error and will be expected to have better predictive power.
36
What is a random walk time series?
It iis when the value of one period is equal to the value in another period plus a random error. It is not stationary
37
How do you detect if a time series is covariance stationary
1. run an AR model
2. Perform the Dickey Fuller test
38
What is ARCH
Autoregressive conditional heteroskedasticity - It is when the variance of the residuals from an AR model are correlated across time et^2 = a0 + a1et-1^2 _ u. If a1 is significant ARCH exists and the variance of errors can be predicted
39
When working with time series what happens when:
a. Neither time series has unit root
b. If only one series has a unit root
c. both time series have a unit root and are cointegrated
d. both time series have a unit root but are not cointegrated
a. the regression can be used
b. The regression results will be invalid
c. The regression can be used
d. the regression will be invalid
40
How do you test if regressions have unit root
Use the Dickey-Fuller test with Engle and Granger critical t-values
41
How do you address overfit
It has a low out-of-sample R-squared. To reduce the problem, use complexity reduction and cross-validation. You exclude features that are not meaningfully contributing to out-of-sample prediction accuracy
42
What is Support Vector Machine (SVM)
A linear classfication that separate the data into one of two classifiers
43
What is K-nearest neighbor
Based on nearness to the observation in the training sample
44
What is Classification and regression tree (CART)
Used for classfying categorical target variables when there are significant nonlinear relationships among variables
45
What is the difference between data cleansing and wrangling
Cleansing - deals with missing, invalid, inaccurate and nonuniform values while Data wrangling - includes preprocessing the data such as data transformation and scaling
46
What is the Precision ratio?
True positive / (false positives + true positives)
47
What is the recall ratio?
True positive / (true positives + false negatives)
48
What is the accuracy ratio?
True Positive + True negatives / All
49
What is the F1 score?
(2 x P x R) / (P + R)
50
What is the F-test
F = (SSEr - SSEu)/q / (SSEu)/(n-k-1)
51
How do we know if we can reject a slope value for a coefficient?
If the t-stat is small or the p-value is high we know the values are insignificant
52
What is the formula for the t-stat
It is estimate/standard error
53
What is the formula for VIF?
VIF = 1 / (1-R2) A lower the value the better higher than 10 indicates serious multicollinearity
54
What are unit roots?
If AR(1) model, then absolute value of the coefficent must be <1
55
What is the mark to market value of a Forward?
Vt = (FPt-FP)(contract size)/ ( 1 + R(days/360))
56
What is covered interest rate parity?
The forward discount will just offset differences in interest rates where spot x 1+rprice currency/1+rbase currency] = forward t
57
What is the relative PPP equation?
Changes in exchange rates will just offset changes in price levels E(percent change in S)A/B = E(pia) - E(pib)
58
What is the international fisher relationship
Interest rate differential = inflation differential RA - RB = E(piA) - E(pib)
59
What is uncovered interest rate parity
Interest rate differentials are offset by changes in depreciation E(percent change in S) = RA - RB
60
How do you implement a carry trade?
E(R) = (investment currency rate - funding currency rate) + E(%change fund/inv)
E(%chhange fund/Inv) = expected change in value of the investment currency
61
What is capital deepening?
an increase in the ratio of capital to labor in an economy
62
What is the marginal product of capital
It is alpha Y/K = r
63
What are the two sources of economic growth?
1. Growth in capital per worker
2. Technological Change
64
What is the growth rate in potential GDP formula
Change in GDP = Chang in Technology + alpha Long-term growth of capital + (1-alpha) change in Long-term growth rate of labor
65
What is the labor productivity growth accounting equation
Growth Rate in potential GDP = long-term growth rate of labor force + long-term growth rate in labor productivity
66
What are the emotions associated with the three growth theories?
1. Classical growth theory - Sad face
2. Neoclassical growth theory - meh face
3. Endogenous growth theory - happy face
67
What is the main point of classical growth theory
No permanenet improvement in standard of living from new technologies
68
What is the point of the neoclassical growth theory?
Economic growth results from discovery of new technologies, it leads to a permanently higher living standard and is independent of population growth. This leads to capital deepending where there is more capital per worker
69
What is the endogenous growth theory
It states that the economy is a perpetual motion machine where there is no stopping and it leads to even more technology
70
Dealer spreads depend on what three factors?
1. Interbank market
2. transaction size
3. dealer-client relationship
71
Interbank spreads depend on what three factors?
1. Currencies involved
2. Time of day
3. Volatility in the currency pair
72
What is the profit on carry trade?
Profit on carry trade = interest differential - change in the spot rate of the investment currency
73
What is the difference between current accounts and capital accounts
Current - flow mechanism, portfolio composition mechanism and debt sustainability
Capital account - account inflows are one of the major causes of the issues
74
What happens to currency if monetary and fiscal policy are expansionary
High Mobility - Uncertain
Low Mobility- Depreciation
75
What happens to currency if monetary policy is expansionary and fiscal policy is restrictive?
High Mobility - Depreciation
Low Mobility- Uncertain
76
What happens to currency if monetary policy is restrictive and fiscal policy is expansionary?
High Mobility - Appreciation
Low Mobility- Uncertain
77
What happens to currency if monetary and fiscal policy are restrictive?
High Mobility - Uncertain
Low Mobility- Appreciation
78
What happens under the Dornbusch overshooting model
A restrictive monetary leads to an appreciation of domestic currency and then a slow depreciation towards the long-term PPP value
79
For downstream sales how do you calculate?
1 profit on sales
2. Calculate the sale of the goods what percent is unsold
3. Take percentage of unrealized profit
4. Find the share of unrealized profit
80
From the control perspective how do we show an acquisition?
1. Eliminate investment account purchases price of parent and equity
2. Create minority interest
3. Calculate goodwill
4. Combine 100% of assets and liabilities of both firms
81
What is the difference between partial and full goodwill
U.S. GAAP requires full IFRS either full or partial
Full goodwill is total value of subsidiary minus FV of net identifiable assets or purchase price/% acquired - FV nia
Partial goodwill is purchase price minus percent acquired times fair value of net assets
82
Sales expenses assets and liabilities and equity are higher under?
Acquisition where NI is the same
83
Net profit margin, RoE and Roa is higher under?
Equity method
84
How is tax deduction at settlement treated in employee benefit plans?
Taken directly to equity ifrs or adjust against tax expense in income statement gaap
85
When calculating dilutive securities what is the assumed proceeds?
Cash proceeds + average unrecognized compensation expense where cash proceeds is the number of options x exercise price
86
What are the PBO components?
Opening PBO + Service cost + Interest costs +\- Actuarial gains or losses +\- Past service costs - benefits paid = Closing costs
87
What is periodic pension cost?
Service cost +\- net interest expense +\- past service costs
88
What is periodic pension cost?
Service cost +\- net interest expense +\- past service costs
89
All others assets and liabilities like PPE intangibles and inc at cost are measured under?
The historical rate
90
Capital stock temporal method
Historical rate
91
Under the temporal
Method monetary assets and liabilities are measured at?
The current rate
92
Revenues and expenses temporal method
Average rate
93
COGS, depreciation and amortization temporal method
Historical rate
94
Dividends temporal method?
Historical when declared
95
All assets and liabilities current rate method
Current rate
96
Capital stock current rate
Historical rate
97
Retained earnings current rate
Accumulate average rates
98
Cumulative FX gains/losses current rate
Plug Figure
99
Revenues and Expenses current rate
Average rate
100
Dividend current rate
Historical rate when declared
101
Aggregate stockholders' equity current rate
Current rate
102
When is there a new monetary assets when is there a gain
Under temporal, there is a gain when the overseas currency is appreciating and a loss otherwise
103
What is common equity for tier 1 capital adequacy?
Common stock, APIC, retained earnings, and OCI
104
What is the total tier 1?
Tier 1 + subordinated instruments with no specified maturity and contractual dividends/interest
105
What is tier 2?
Tier 1 + Subordinated instruments with original maturity greater than 5 years
106
What is the provision for loan losses?
Bad debt expense in the I/S = net charge-offs (charge offs + recoveries) + change in allowance for loan losses (provision)
107
What is the liquidity coverage ratio?
Highly liquid assets/expected cash outflow
108
What is the net stable funding ratio?
Available stable funding/required stable formula
109
What is the soft/hard pricing combined ratio?
(Total incurred losses + expenses)/net premium earned high indicates a soft market
110
What is the underwriting loss ratio?
Claims + change of loss reserves + loss adjustment expenses/net premium earned
111
What is the expense ratio?
Underwriting expenses/net premium written
112
What is the difference between net premium written and net premium earned?
Written - premiums earned over the period of coverage, where earned is the premium earned over a relevant accounting period
113
What is the dividend to policyholders ratio?
Dividends to policyholders/net premium earned
114
What is the combined ratio after dividends?
Combined ratio + dividends to policyholders ratio
115
What is ROE?
Tax Burden x Interest burden x EBIT margin x Asset Turnover x Financial Leverage or NI/EBT x EBT/EBIT x EBIT/Revenue x Revenue/Average assets x Average Assets/Average Equity
116
What is considered a reportable business or geographic segment
50% of its revenue from sales extenral to the firm and at least 10% of a firm's revenue, earnings, or assets
117
What is NOA?
Net Operating Assets = (Total Assets - Cash) - (Total Liabilities - Total Debt)
118
What are aggregate accruals?
NOAt - NOAt-1 or NI - (CFOt + CFIt)
119
What is the accruals ratio?
Aggregate accruals/(NOAt + NOAt-1)/2
120
What is the market value decomposition formula?
Market capitalization of parent - parent;s share of associates' makret cap = implied value of parent then divide by NI - parent's share of associate's earning
121
What is 20 to 50 percent ownership
It is investments in associates where there is a signficiant influence and we are using the equity method
122
What is less than 20% ownership
Investment in financial assets where there is no significant influence where it is carried at amortized cost, fair value through profit or loss, fair value through OCI
123
What is more than 50%?
It is considered control and we would use the acquisition method
124
