DUBLIN CITY UNIVERSITY

MSc in Investment, Treasury and Banking

EF501 Applied Econometrics
Dr. M. Lynch

Review Question Sheet 1

4th Feb 2017

Q1.
a) Explain, using equations, the difference between the sample regression function, SRF,
and the population regression function, PRF.
b) What is a random variable?

Q2.
a) What four assumptions are usually made about the unobservable error terms in the
Classical Linear Regression Model?
b) Briefly explain the meaning of each.
c) Why are these assumptions necessary?

Q3.
a) Differentiate between an estimator and an estimate.
b) Is the OLS estimator superior to all other estimators? Explain.

Q4.
a) What is meant by saying that a regression model needs to be linear in the
parameters?
b) Does it need to be linear in the variables?

Q5.
Which of the following models can be estimated (following a suitable
rearrangement if necessary) using ordinary least squares (OLS), where X, y and Z
are variables and , and are parameters to be estimated.

yt + xt ut
(a) = +

yt xt ut
(b) = + +

yt
x u
(c) ln ) = + ln( t ) + t

yt xt zt ut
(d) =+ +

Show how the following exponential function can be estimated using OLS

yt eu
= e xt
t

1
Q6.
Table 8 Sample Data on Fund XX
Year Excess return on Fund XX Excess return on Market Index
t xt yt

1 17.8 13.7
2 39 23.2
3 12.8 6.9
4 24.2 16.8
5 17.2 12.3

xt yt
Given the sets of observations and in Table 8 above, verify that ^ = -1.74
^
and = 1.64 using the following formulas.

x y Tx y and
t t
y x
x Tx 2
t
2

Q7.
yt
^ xt . xt
The fitted line in Question 8 is written as: = -1.74 + 1.64 If is the excess
yt
return of the market portfolio over the risk free rate and is the excess return on fund
XX, how would you interpret the regression equation?

Q8.
u^ t
a) Show, using a diagram the residual .
b) Explain why the vertical distances are squared before being added together?
c) Explain the meaning of the term RSS

Q9.
yt
^ xt
The fitted line in Question 6 is written as: = -1.74 + 1.64 . If the market yields a
return that is 20% higher than the risk-free rate this year what will the return on the fund XX
be?
In words, how would you interpret the coefficient estimate of 1.64 for ?

Q10.

2
 yt xt
The following data have been calculated from a regression of on and a constant
over 22 observations.

xt yt 830102,T =22, x = 416.5 , y = 86.65, x t2 = 3919654

^
Calculate ^ and