Regression

Question 1

What does a regression coefficient tell you in a financial context?

Answer 1

It shows the direction and strength of the relationship between the independent variable and the dependent variable (e.g., asset returns)

Question 2

How do you test if a variable is statistically significant in a regression?

Answer 2

Use the t-statistic:

𝑡 = Estimate / StandardError

Question 3

What does an R-squared value tell you in a regression?

Answer 3

R-squared measures the proportion of variation in the dependent variable that is explained by the independent variables in the model.

Question 4

What does it mean if a variable is not statistically significant?

Answer 4

It means there is insufficient evidence to say the variable has a real effect on the outcome — its coefficient could be due to random noise in the data.

Question 5

What does a high t-statistic indicate in a regression?

Answer 5

That the variable’s coefficient is far from zero, relative to its standard error, indicating statistical significance and likely a real effect.

Question 6

What’s the formula for degrees of freedom in a regression?

Answer 6

N - K
Where 𝑛 is number of observations, and 𝑘 is number of independent variables.