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Student id. ..................................

School of Business and Economics

EXAMINATION Version: TS

Course : Quantitative Methods 3 Code: EBS2001

Course : QM Emerging Markets Code: EBS2064
Coordinator : C. Kerckhoffs

Date : 22 January 2016 Time: 13.00-16.00h

Location : MECC Westhal

Communications devices and watches are not allowed – put them in your bag (under your
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fraud to the Board of Examiners.

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to the Board of Examiners.
Sanctions by the Board of Examiners on fraud or irregularities include such measures as:
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- exclusion from participation or further participation in one or more examinations or exams at the SBE
for a period of time to be determined by the Board of Examiners, with a maximum period of one year;
- termination of the student’s registration for the study programme concerned.

This examination consists of:

20 Pages (including this front page, statistical tables and formulas; please check that you received all
pages, before you start answering)
25 Multiple choice questions

You are allowed to make use of:

Scrap paper and a Casio FX-82 or FX-85 calculator (all subtypes). Books etc. are not allowed.

Norm:
For a sufficient result you need a score of at least 16 (out of 25) correctly answered multiple-choice
questions. Your score will be translated into a grade on the basis of the table in section 1.5 of the
QM3 course manual.

Publication of the results / Procedure for objections:

Within 10 workdays after the exam, preliminary grades will be published on Eleum, and a consultation
hour will be scheduled. All issues raised by this exam have to be put forward during this consultation
hour. Protests or other forms of objection, not brought in during this consultation hour, will not be
taken into consideration. The final grades will be published within 15 workdays after the exam.

Particulars:
- As in any multiple choice exam, there is only one correct answer to each question; partial scores
will not be awarded.
- Answer the questions on the answer card provided, preferably using a blue or black ballpoint.
- If not preprinted, then your identity number, name and course code have to filled in manually on
the answer card.
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version code your form may be lost, whilst filling in the wrong version code is equally disastrous!

You have to hand in the entire examination set. It is not allowed to take home, copy or
photograph the examination or parts of it!
(You can write your answers on a piece of scrap paper and take it home).

SUCCESS!
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VERSION TS

Questions 1-9): An empirical market research project (Case 2)

Astec, one of the world’s largest suppliers of industrial power supply products, faces increasing
competition by low-cost Asian competitors. Its management believes that clients might be willing to pay
a premium for the following service area, thus enabling Astec to differentiate itself from price-oriented
suppliers: assisting its clients in their assembly operations. Note that we ignore the other two service
areas that were addressed in the version of case 2) as discussed during the QM3 tutorials.
Astec’s marketing manager hires a marketing research agency to examine the size of the market
segment that is interested in expanded services in this area, and to identify the industrial and financial
profile of that segment. The population of interest is all industrial firms that use power supply generators
as an input to their products. For a sample of such firms, a mail survey was sent to their purchasing
managers. Below, you find (a small part of) the questionnaire that was used for this survey. Complete
answers have been obtained from 151 purchasing managers. The variables in the resulting dataset have
the same name as the survey questions (see the leftmost column of the table).

Astec questionnaire (in part)

Please indicate your agreement with the following statement (Q7) on a 1 to 7 scale,
where 1 means “strongly disagree” and 7 “strongly agree”.
I would like assistance in placing the power supply generators in
Q7 1 2 3 4 5 6 7
my products.
If a company were to offer additional service programs to assist
Q16 Ο 0 No Ο 1 Yes
you, do you think you would be more likely to use that supplier?
Ο 1 Less than $1 million
Ο 2 $1 million to $4.999 million
Q21 Company sales:
Ο 3 $5 million to $9.999 million
Ο 4 $10 million or more
Ο 1 Low tech
Q22 Company level of technology: Ο 2 Medium tech
Ο 3 High tech
Ο 1 Computer
Which of the following best describes your primary category of Ο 2 Appliances
Q23
manufacturing? Ο 3 Electronics
Ο 4 Other, ……..

(Question 1)
We started our discussion of Case 2 with an exploratory analysis of the data, using the SPSS-menu
Analyze > Descriptive Statistics. The first two options under this menu are “Frequencies” and
“Descriptives”. Now consider an exploratory analysis of the variables Q7 and Q23.

1. Which of the following statements is correct?

a) We might use the option “Descriptives” for Q7, but should use “Frequencies” for Q23.
b) We might use the option “Descriptives” for Q23, but should use “Frequencies” for Q7.
c) We might use the option “Descriptives” for both Q7 and Q23.
d) We should use the option “Frequencies” for both Q7 and Q23.

(Questions 2-3)
The researchers wonder whether the average score on variable Q7 differs between the three categories of
variable Q22, and they decide to use “One-way ANOVA” to examine the issue. The results are reported
on the next page.
 3

2. Which of the following assumptions is definitely not required to make this ANOVA-test a valid
statistical procedure?
a) Q7 can roughly be interpreted as a quantitative variable measured on an interval scale.
b) The variables Q7 and Q22 are independent.
c) The variance of Q7 is roughly similar in all of the three subpopulations defined by Q22.
d) The distribution of Q7 is roughly normal in all of the three subpopulations defined by Q22.

(Question 3)
Consider the following two claims concerning the “Sums of Squares” as reported in the ANOVA-table
above.
I) The “Between Groups Sum of Squares” basically reflects the differences between the “Means” as
reported in the “Descriptives” table.
II) The “Within Groups Sum of Squares” basically reflects the differences between the “Standard
Deviations” as reported in the “Descriptives” table.

3. a) Both claims I) and II) are correct.

b) Both claims I) and II) are incorrect.
c) Claim I) is incorrect, claim II) is correct.
d) Claim I) is correct, claim II) is incorrect.

(Questions 4-5)
The researchers also wonder whether the average score on the variable Q7 differs between the two
categories of variable Q16 or not, and they decide to use an “Independent-samples t-Test” to examine the
issue. The results are reported below and on the next page.
 4

4. Which of the following statements concerning the null hypothesis of interest is correct?
a) The null cannot be rejected at the 10% significance level.
b) The null can be rejected at the 10% significance level, but not at 5%.
c) The null can be rejected at the 5% significance level, but not at 1%.
d) The null can be rejected at the 1% significance level.

5. The p-value of 0.002, reported in the third column from the left in the “Independent Samples Test”
table above, is so small because…
a) … the “N’s” reported in the “Group Statistics” table are quite different.
b) … the “Means” reported in the “Group Statistics” table are quite different.
c) … the “Standard Deviations” reported in the “Group Statistics” table are quite different.
d) … the “Standard Errors of the Mean” reported in the “Group Statistics” table are quite different.

(Questions 6-8)
Below, you find a crosstable of variable Q16 against variable Q23, containing the socalled “observed
frequencies” Obsij.

(Question 6)
The researchers know that, in the relevant population of firms, 10% is in the computer business, 55% in
the appliance business, 28% in the electronics business and 7% in some other line of business. They use a
“Chi-square Test for Goodness-of-Fit” to examine whether, in this respect, the sample can be regarded as
representative of the population.

6. The p-value of the implied null hypothesis …

a) … is larger than 10%.
b) … is between 5% and 10%.
c) … is between 1% and 5%.
d) … is smaller than 1%.
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7. On the basis of the information in the crosstable on the previous page, what is our best estimate for
the conditional probability P ( “Willing to switch” | “Electronics” ) ?
a) Smaller than 20%.
b) Somewhere between 20% and 50%.
c) Somewhere between 50% and 80%.
d) Above 80%.

(Question 8)
The researchers suspect: The willingness to switch differs between the various lines of business. On the
basis of the crosstable on the previous page, they perform a “Chi-square Test of Independence” to
examine this issue. SPSS reports a test statistic of c2 = 20.569 .

8. Which of the following statements is correct?

a) The null hypothesis can not be rejected at the 5% significance level: this outcome supports the
researchers’ suspicion.
b) The null hypothesis can be rejected at the 5% significance level: this outcome supports the
researchers’ suspicion.
c) The null hypothesis can not be rejected at the 5% significance level: this outcome does not
support the researchers’ suspicion.
d) The null hypothesis can be rejected at the 5% significance level: this outcome does not support
the researchers’ suspicion.

(Question 9)
The researchers wonder whether there is a relation between Q7 and Q21. They perform two different
analyses:
I) “One-way ANOVA”, with Q7 as response and Q21 as factor. The resulting p-value for the “equal
means” null hypothesis is 0.000 .
II) “Spearman’s rank correlation” between Q7 and Q21. The resulting p-value for the “zero correlation”
null hypothesis is 0.111 .
As you can see, the results seem to be somewhat paradoxical: at the conventional levels (i.e. 1%, 5% or
10%), analysis I) yields a significant result, while analysis II) doesn’t.

9. Which of the following statements is the most helpful to understand this apparent paradox?
a) Ignore the results for Analysis I): given the measurement scales of the variables at hand, this
analysis is illegitimate here.
b) Ignore the results for Analysis II): given the measurement scales of the variables at hand, this
analysis is illegitimate here.
c) The relation between Q7 and Q21 is probably non-monotonic.
d) Inevitably, a paradoxical result like this will occasionally occur as a result of sampling chance.

(please turn to the next page)

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Questions 10-18): The CAPM (Case 4)

The Capital Asset Pricing Model (CAPM) implies that the following relation should hold
for the (excess) returns on any particular stock:

(1) ( Rt - R Ft ) = a + b ( RMt - R Ft ) + e t t = 1,…,T

where Rt is the return on the stock at hand, RFt the return on a risk-free asset, and RMt the return on the
market portfolio, all in period t. In CAPM-lingo, the intercept is known as alpha and the slope as beta.
Finance theory suggests that the intercept should be zero.
We want to test the validity of the CAPM for AKZO-Nobel, one of the firms that are represented in
the AEX (the leading Dutch stock market index). Our dataset contains monthly returns (in per cent) on
the AKZO-Nobel stock for the entire period 1993-1 till 2008-4 (i.e. T = 184 months), and also on the
Dutch market portfolio. All returns are already in excess of the risk-free rate. The estimation results for
model (1) are reported below.

10. Which technical problem can definitely not occur in model (1)?
a) Collinearity.
b) Nonconstant error variance (e.g. “fanning out”).
c) Nonlinearity.
d) Nonnormal errors.

(Question 11)
Consider the null hypothesis that the AKZO-Nobel stock follows the market index one-for-one (apart
from diversifiable risk), against a two-sided alternative:

H0: β = 1 vs. HA: β ¹ 1

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11. Against the stated alternative, the p-value of this null hypothesis is …
a) … smaller than 5%.
b) … somewhere between 5% and 10%.
c) … somewhere between 10% and 20%.
d) … larger than 20%.

(Question 12)
Consider the following two results concerning the CAPM-intercept, i.e. alpha.
I) On the basis of model (1), we can easily examine the null hypothesis H0: α = 0 with a normal “t-test”.
When using two-sided tests with 10% significance, it turns out that this null is rejected for 2 of the 16
stocks that were part of the AEX during our entire observation period.
II) Some financial practitioners believe that “January is different”, in the sense that the January-intercept
or alpha is different from the alpha for the remaining 11 months. This issue can be examined by
adding a January-dummy to model (1), i.e. a dummy which equals 1 in each January, and 0 in all
other months. The t-statistic of this dummy allows us to test the null hypothesis that “the January-
alpha is the same” against the alternative that “the January-alpha is different”. As it turns out, when
using two-sided tests with 10% significance, this null is rejected for 6 of the 16 stocks that were part
of the AEX during our entire observation period.

12. Which of the following claims concerning the results reported at I) and II) above is correct?
a) Both the results at I) and II) cast clear doubt on the general validity of the CAPM.
b) Neither the result at I) nor that at II) casts clear doubt on the general validity of the CAPM.
c) The result at I) casts clear doubt on the general validity of the CAPM; the result at II) doesn’t.
d) The result at II) casts clear doubt on the general validity of the CAPM; the result at I) doesn’t.
Hint: Remember the Type I error concept!

(Question 13)
The histogram alongside shows the (unstandardized)
residuals of model (1). As you can see, there are several
potential outliers. The largest residual, of +21.1%,
occurs in April 1999.

13. Which of the following statements concerning the

interpretation of this residual is the most adequate?
a) In this month, the return on AKZO-Nobel stock
outperformed the market index by 21.1%.
b) In this month, the return on AKZO-Nobel stock
was 21.1% more than model (1) would predict.
c) In this month, the return on the market index
must have been very low.
d) In this month, the return on AKZO-Nobel stock
must have been very high.

(Question 14)
Since our model (1) involves time series data, it is potentially subject to the problem of first-order
autocorrelation. On the next page, you find a residual plot, showing the residuals of model (1) against
their own lagged values.
 8

14. What can be concluded from this

plot?
a) The plot suggests that first-order
autocorrelation (either positive or
negative) is absent in model (1).
b) The plot strongly suggests the
presence of positive first-order
autocorrelation in model (1).
c) The plot strongly suggests the
presence of negative first-order
autocorrelation in model (1).
d) A plot of this type does not give
any useful information about the
phenomenon of first-order
autocorrelation.

(Questions 15-18)
An important consideration in empirical finance is the issue of parameter stability. As firm policies or
market conditions change over time (sometimes quite abruptly), so may the alphas or betas of those
firms, a phenomenon known as an alpha- or beta-break. In the case at hand, it may be interesting to
distinguish two subperiods:
i) 1993-1 until 2000-3 (i.e. the first 87 observations);
ii) 2000-4 until 2008-4 (i.e. the remaining 97 observations).
As you know, the second subperiod was characterized by the sudden burst of the IT bubble, followed
(chronologically) by the onset of a worldwide recession and a strong decline of the stock market in
general. Now consider the following dummy-interaction model:

~
(2) ( Rt - R Ft ) = α + α~break t + β ( R Mt - R Ft ) + β ( RMt - R Ft ) × break t + ε t t = 1,…,184

where the break-dummy is defined as follows:

breakt = 0 for t = 1,…,87 (i.e. 1993-1 until 2000-3)
breakt = 1 for t = 88,…,184 (i.e. 2000-4 until 2008-4)
Using again the AKZO-Nobel stock, the SPSS-results for model (2) are reported below and on the next
page.
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(Question 15)
Consider the following two claims about the numerical interpretation of the estimated coefficients of
model (2), disregarding whether they are significant or insignificant:

I) In the first subperiod, alpha was negative; in the second subperiod, alpha was positive.
II) In the first subperiod, beta was larger than 1; in the second subperiod, beta was smaller than 1.

15. a) Claims I) and II) are both correct.

b) Claims I) and II) are both incorrect.
c) Claim I) is correct, claim II) is incorrect.
d) Claim I) is incorrect, claim II) is correct.

(Question 16)
Consider the following verbally stated null hypothesis:
“Both alpha and beta have been stable across the two subperiods distinguished here.”

16. Which of the following mathematical expressions in terms of the coefficients of model (2) is a
correct translation of this verbally stated null hypothesis?
~
a) H0: α = α~ and β = β
b) H0: α = 0 and β = 0
~
c) H0: α~ = 1.553 and β = -0.240
~
d) H0: α~ = 0 and β = 0

17. If we compare models (2) and (1) using a “Partial F-test”, then the p-value of the implied null
hypothesis is …
a) ... larger than 10%.
b) ... somewhere between 5% and 10%.
c) ... somewhere between 1% and 5%.
d) ... smaller than 1%.

(Question 18)
While discussing Case 4 in class, we considered an alternative approach to the dummy-interaction model
(2): split the dataset in the two subperiods i) and ii), and then estimate model (1) for both subperiods
separately. Let’s refer to the resulting models as model (1i) and model (1ii). You will remember that this
“split the dataset” approach is actually closely related to the “fit a dummy-interaction model”-approach
which we used above.
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18. Which of the following statements about this relation is not correct?
a) The sum of the “Residual Sum of Squares” of models (1i) and (1ii) is equal to the “Residual Sum
of Squares” of model (2).
b) The null hypothesis “Beta has been stable across the two subperiods” can be tested on the basis
of the outputs for models (1), (1i) and (1ii): we do not need to estimate model (2).
c) The alphas and betas which model (2) implies for the subperiods before and after the break are
equal to the alphas and betas reported in models (1i) and (1ii) respectively.
d) The null hypothesis “Both alpha and beta have been stable across the two subperiods” can be
tested on the basis of the outputs for models (1), (1i) and (1ii): we do not need to estimate model
(2).

(please turn to the next page)

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Questions 19-25): Reading an empirical article (Case 6)

Case 6 addresses the article by L.M. Hitt, D.J. Wu and X. Zhou (2002), “Investment in Enterprise
Resource Planning (ERP): Business Impact and Productivity Measures”, Journal of Management
Information Systems, 19(1), pp. 71-98. This article discusses the effects of introducing ERP software
systems on business performance. Starting point for the authors’ dataset is the population of all firms
traded on Compustat. They have matched these data with information about all licence agreements for
the leading SAP R/3 ERP system, sold during 1986-1998. Ultimately, their dataset contains 4,069 firm-
year observations referring to firms that implemented SAP R/3 somewhere during 1986-1998.
The authors use three basic measures to analyze the impact of ERP adoption on performance: financial
performance ratios, productivity and Tobin’s q. Here, we only address the latter two measures. In the
models (1) and (2) defined below, the function “log” refers to natural logarithms. Furthermore, the start
and complete variables, which segment the period 1986-1998, are defined as follows:
- start: a dummy which starts from zero, becomes one in the year in which an ERP implementation is
started, and remains one;
- complete: a dummy which starts from zero, becomes one in the year in which an ERP
implementation is completed, and remains one.

1) Productivity analysis
This approach is based on the economic concept of a production function, which relates a firm’s value
added (VA, i.e. sales minus materials) to its capital input (K) and its labor input (L). From the basic Cobb-
Douglas production function VA = K α1 Lα2 , the following specification is derived:

(1) logVA = β0 + β1start + β2complete + α1logK + α2logL + dummies + ε

Note that a positive effect of the adoption variables start and complete indicates that, upon adoption,
firms manage to squeeze more value added out of the same amounts of capital and labour, thus indicating
increased productivity. The “dummies” refer to “year dummies” (distinguishing each of the years 1986-
1998) and “industry dummies” (distinguishing between ten broad industrial sectors).

2) Tobin’s q analysis Table 6: Productivity and Market Value:

Tobin’s q is the ratio of a firm’s market value to its book Before, During & After ERP Implementation
value. A high ratio indicates that the stock market is (Adopters only)

rewarding a firm. The authors use the following Response variable

log ( value log ( market
added ) value )
specification:
Interpretation productivity Tobin’s q
(2) log ( market value ) = β0 + β1start + β2complete
0.036 0.063
start
+ α1 log ( book value ) + dummies + ε (0.0241) (0.0360)
-0.047 0.016
complete
Note that the response variable is not Tobin’s q itself, but (0.0246) (0.0364)
***
the natural log of its numerator. The log of its denominator log ( book value )
0.981
(0.0105)
has been brought to the right-hand side, and the associated ***
0.368
coefficient α1 has been freely estimated. log ( capital )
(0.0082)
***
The relevant estimation results are reported in Table 6 log ( labor expense )
0.635
(0.0087)
alongside, where the middle column refers to eq. (1) and the
control variables industry, year dummies
right-hand column to eq. (2). On the basis of these results, 2
the authors examine a number of issues of interest. R 0.972 0.948
observations 4,069 4,069
standard errors in parentheses
*** ** *
p < 0.001; p < 0.01; p < 0.05
 12

19. How many different firms are represented in Table 6?

a) Roughly 4,000.
b) Roughly 600.
c) Roughly 300.
d) There is insufficient information to make a sensible choice between the options a), b) and c).
N.B.: The word “roughly” allows for a 10% deviation in either direction.

(Question 20)
The authors mention that, on average, it takes almost two years to implement the SAP R/3 ERP-system.
Now imagine, by means of thought experiment, that implementation is a matter of only a few weeks.

20. If this were the case, then the regressions reported in Table 6 would probably be subject to …
a) autocorrelation.
b) nonnormality.
c) collinearity.
d) There is no reason to expect any of the problems mentioned at options a), b) and c).

(Question 21) measure

The graph alongside is meant to sketch the development of
a firm’s productivity or its Tobin’s q over time as predicted
by eqs. (1) or (2), under the following assumptions:
i) The firm started its ERP implementation in 1990.
ii) The firm completed its ERP implementation in 1994.
iii) All other explanatory variables in eqs. (1) and (2) are
assumed to be constant during the 1986-1998 period. 1990 1994 time

21. a) The general shape of the graph gives a correct picture for eq. (1), but not for eq. (2).
b) The general shape of the graph gives a correct picture for eq. (2), but not for eq. (1).
c) The general shape of the graph gives a correct picture for both eqs. (1) and (2).
d) The general shape of the graph gives an incorrect picture for both eqs. (1) and (2).

N.B.: Please interpret this question in terms of the numerical values of the relevant coefficient
estimates, disregarding whether they are significant or insignificant.

(Question 22)
Consider the following null hypothesis in terms of the coefficients of eq. (1):
H0: β1 + β2 = 0 vs. HA: β1 + β2 ¹ 0
As in Case 5, such a null hypothesis can be examined with the “Partial F-test.

22. Which of the following proposals would lead to a valid partial F-test?
a) The “Complete” model is the basic eq. (1); the “Reduced” model is eq. (1) without the two
dummies start and complete.
b) The “Complete” model is eq. (1) with the interaction term start*complete added; the “Reduced”
model is the basic eq. (1).
c) The “Complete” model is the basic eq. (1); the “Reduced” model is eq. (1) where the two
dummies start and complete are replaced by the single explanatory variable start + complete.
d) The “Complete” model is the basic eq. (1); the “Reduced” model is eq. (1) where the two
dummies start and complete are replaced by the single explanatory variable start – complete.
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(Questions 23-25)
The next four questions are all about the authors’ Tobin’s q analysis, i.e. eq. (2).

(Question 23)
As we have seen, in the original article the start-dummy is defined as follows: it starts from zero, becomes
one in the year in which an ERP implementation is started, and remains one. Now imagine that the authors
had defined the start-dummy in a slightly different fashion: it starts from zero, becomes one in the year in
which an ERP implementation is started, and then turns back to zero in the year in which this
implementation is completed. E.g. for a firm that starts its ERP-implementation in 1990 and completes it
in 1994, we would have the following picture:

86 87 88 89 90 91 92 93 94 95 96 97 98
Original start 0 0 0 0 1 1 1 1 1 1 1 1 1
definition complete 0 0 0 0 0 0 0 0 1 1 1 1 1
Alternative start 0 0 0 0 1 1 1 1 0 0 0 0 0
definition complete 0 0 0 0 0 0 0 0 1 1 1 1 1

Now consider the coefficient of the complete-dummy in the “Tobin’s q”-column of Table 6. Currently,
this coefficient is estimated at 0.016 .

23. If the authors had applied the alternative definition of the start-dummy described above, then what
value would they have obtained for this coefficient?
a) 0.079
b) 0.047
c) 0.016
d) This can only be determined by repeating the estimation, using the alternative definition of the
start-dummy.

(Question 24)
As you can see in Table 6, our point estimate for a1 in eq. (2) is given by a1 = 0.981. Let us take this value
for granted, disregarding whether it differs significantly from 1 or not. In the statements below, we take
the firm’s book value as our measure for firm size.

24. Which of the following statements concerning the implications of a1 being 0.981 is correct?
a) For given values of the other explanatory variables, larger firms tend to have a higher Tobin’s q
than smaller firms.
b) For given values of the other explanatory variables, larger firms tend to have a lower Tobin’s q
than smaller firms.
c) For given values of the other explanatory variables, firm size does not affect Tobin’s q.
d) There is insufficient information to make a motivated choice between the options a), b) and c).

(Question 25)
As noted above, the “dummies” in eq. (2) include “year dummies”, i.e. separate dummies for each of the
years 1986-1998. On p. 79 of their article, the authors explain that these dummies are included …

“…to capture transitory, economy-wide shocks that affect performance. For instance, the year
dummies remove the upward trend in the stock market that occurred over our sample period, thus
avoiding possible spurious correlation between stock market growth and increasing diffusion of
ERP”.
 14

Now imagine that the authors had estimated eq. (2) without those “year dummies”.

25. Under this scenario, the estimated coefficients of the start- and complete-dummies …
a) are likely to underestimate the effect of ERP adoption on Tobin’s q.
b) are likely to overestimate the effect of ERP adoption on Tobin’s q.
c) will still provide a fair view of the effect of ERP adoption on Tobin’s q.
d) There is insufficient information to make a motivated choice between the options a), b) and c).
 15

Answer key QM3 IB/FE (EBS2001), QM Emerging Markets (EBS2064), first sit, 22 January 2016

Version
Question TS

1 a Q7 might be regarded as (pseudo-)interval, but Q23 is nominal.

Lecture 1, slides 8-9.
2 b The correct assumption is that we can regard our sample as three independent subsamples from the
three subpopulations defined by Q22; not that the variables Q7 and Q22 should be independent.
The other three assumptions are correct.
Lecture 1, slide 23.
3 d The “Within Group Sum of Squares” does not depend on the differences between the sample
standard deviations (i.e. variances), but on their values as such.
Sharpe, section 21.7.
4 a The relevant p-value is 0.217. The question suggests a two-sided alternative (see the “or not”) ; but
even with one-sided alternative, we could not reject the null at 10% significance.
Lecture 1, slides 20-22.
5 c Levene’s test for equality of the population variances is obviously based on the sample variances,
i.e. the squares of the sample standard deviations. The further these are apart, the more evidence
there is against the “equal variances” null hypothesis.
Lecture 1, slide 21-22.
6 c With H0: p1=0.1, p2=0.55, p3=0.28 and p4=0.07, we get Exp1=15.1, Exp2=83.05, Exp3=42.28 and
Exp4=10.57, leading to a test statistic of c2=8.1. With 4–1=3 df, this is in between the 1% and 5%
critical values of 11.345 and 7.815 respectively.
Lecture 1, slides 32-35.
7 d It’s 44/53 = 0.83.
Lecture 1, slides 38-39.
8 b The researchers’ suspicion implies that the null hypothesis of independence is not true. With (4–
1)*(2–1) = 3 df, the 5% critical value is 7.815, so that the null can indeed be rejected at 5% (in fact,
even at 1%). This supports their suspicion.
Lecture 1, slides 36-39.
9 c Q7 is pseudo-interval; Q21 is ordinal. This implies that both oneway-ANOVA (which involves
“downgrading” Q21) and Spearman’s rank correlation (which possibly involves “downgrading”
Q7) are perfectly legitimate. The problem must be that the relation between Q7 and Q21 is non-
monotonic. As it turns out, from size category 1 up to 4, the average scores for Q7 are, in turn, 2.75,
5.38, 3.32 and 2.23. The differences between these means are highly significant (which is what the
ANOVA-test picks up), but they lack a consistent direction (and hence Spearman’s rank correlation
turns out insignificant).
Lecture 1, slides 23-25, 31; Case 2, item f).
10 a Collinearity has to do with the strength of the relation between the explanatory variables, and can
therefore only occur in multiple regression models, not in simple regression models.
Lecture 2, slide 31.
11 c The test statistic is t = (1.091–1)/0.069 = 1.32: with 182≈180 df, this is in between the 5% and 10%
critical values of 1.653 and 1.286. Since the alternative is two-sided, we must double these
percentages, so the p-value is somewhere in between 10% and 20%.
Lecture 2, slides 11-12.
12 d The significance level is the probability of a Type I error. That means: rejecting the null when it is
actually true, just because of sampling chance. So when applying two-sided tests with 10%
significance to 16 stocks, we should expect 1 or 2 of such “false alarms” even when the null
hypothesis is true across the board. The result at I) is therefore no problem. But 6 out of 16 is a bit
on the high side: this being much more than the anticipated 1 or 2 “false alarms”, we should get
suspicious.
Case 4, item i).
13 b Lecture 2, slide 7 (i.e. the definition of the residuals).
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14 a This kind of plot represents the standard graphical tool to judge whether there are indications of
first-order autocorrelation. After all, such correlation involves a linear relation between the model’s
current errors and the previous errors: so the obvious approach is to relate the model’s current
residuals to its previous residuals. In the plot at hand, we seem to observe a random scatter: this
suggests that the current and the previous residuals are unrelated, i.e. that first-order autocorrelation
is absent from our model.
Lecture 2, slides 32-33.
15 c In the first subperiod, with breakt = 0, the model reduces to:
( R t - R Ft ) = a + b ( R Mt - R Ft ) + e t
Consequently, the estimated intercept (alpha) is –0.875 and the estimated slope (beta) 1.247.
In the second subperiod, we have breakt = 1, so that the model reduces to:
~
( Rt - RFt ) = (α + α~) + ( β + β )(RMt - RFt ) + ε t
Consequently, the estimated intercept (alpha) is –0.875+1.553 = 0.678 and the estimated slope
(beta) 1.247–0.240 = 1.007.
Lecture 2, slides 16-18.
16 d If both the “tilda” coefficients in model (2) are put to zero, we have model (1) back, implying a
common alpha and beta for both subperiods. This is what the null hypothesis says.
Lecture 2, slides 16-18.
17 b With SSER = SSE(1) = 5320.175 and SSEC = SSE(2) = 5159.230, we get
(5320.175 - 5159.230) /(3 - 1)
F= = 2.81
5159.230 /(184 - 3 - 1)
With 2 numerator-df and 180 denominator-df, this is in between the 5% and 10% critical values of
3.05 and 2.33 respectively.
Lecture 2, slides 34-37.
18 b The correctness of options a) and c) should be obvious. Option d) is also correct: with the SSE of
model (2) equal to the sum of the SSE’s of models (1i) and (1ii), the test performed at question 17)
can actually be run without estimating model (2). However, this concerns the joint test for H0:
~
α~ = β = 0 . To test for an alpha- or beta-break only, we need the associated t-statistic, i.e. we need
the output for model (2).
Case 4, items j) to n).
19 c It’s a panel data set, meaning that (ideally, at least) we have a time series of 13 successive annual
observations (over the period 1986-1998) for each firm. So with 4,069 “firm-year observations”, we
should have 4,069 /13 = 313 firms.
Lecture 1, slide 8.
20 c If completion of the implementation would take place almost immediately after its start, the start-
and complete-dummies would almost coincide. This would cause extreme collinearity between the
two.
Lecture 2, slide 31.
21 a In eq. (1), the start- and complete-coefficients of 0.036 and -0.047 respectively imply that, upon the
start of the ERP implementation, productivity is predicted to rise by 3.6%, and then to fall by 4.7%
upon completion, so that we end up 1.1% lower than before. The general shape of the graph is
consistent with this.
In eq. (2), the start- and complete-coefficients of 0.063 and 0.016 respectively imply that, upon the
start of the ERP implementation, Tobin’s q is predicted to rise by 6.3%, and then by an additional
1.6% upon completion, so that we end up 7.9% higher than before. The general shape of the graph
is inconsistent with this.
Lecture 2, slides 13-15.
22 d A reduced model is always obtained by plugging the null hypothesis into the complete model
(which is, of course, eq. (1)). Now note that we can write the null as H0: b2 = –b1. Plugging this into
eq. (1), we get:
log ( VA ) = β0 + β1start – β1complete + α1 logK + α2 logL + dummies + ε
= β0 + β1(start–complete) + α1 logK + α2 logL + dummies + ε
Lecture 2, slides 34-35.
23 a As already noted for question 21), according to the current Table 6, log(market value) will rise by
0.063 at the start of an ERP implementation, when the start-dummy is switched on. At completion,
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when the complete-dummy is switched on too, it will rise by an additional 0.016, for a total rise of
0.079, compared to the pre-implementation value.
Now under the new definition of the start-dummy, the content of the data does not change. It’s like
the choice of a base level dummy: the basic relationships remain the same, it’s just that they are
measured in a different perspective. So under the new definition of the start-dummy, we must still
obtain a total rise of 0.079. But with the new start-dummy turned off at completion, all of this now
has to come from the complete-dummy.
Case 6, passim.
24 b The estimated coefficient of 0.981 implies that, when a firm’s size i.e. its book value rises by e.g.
10%, its market value rises by only 9.8%. Consequently, Tobin’s q i.e. the ratio of market value to
book value will get smaller.
Lecture 2, slide 28.
25 b As time progresses from 1986 to 1998, ever more firms have adopted ERP; this implies that the
average value of the start- and complete-dummies increases over time. Now if the market value of
most firms also tends to increase over time for reasons totally unrelated to ERP adoption, then these
two explanatory variables will tend to pick this up, by taking on (more) positive coefficients.
Lecture 2, passim.