Page 10 - FINAL CFA II SLIDES JUNE 2019 DAY 2
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LOS 7.d: Distinguish between the dependent and MODULE 7.2: LINEAR REGRESSION: INTRODUCTION
independent variables in a linear regression.
In a general form straight line equation: Y = a + bX, Y is the Dependent variable (also called the explained, endogenous, or the predicted
variable) and X is the Independent variable (also called the explanatory variable, exogenous, or predicting variable).
Say we want to use excess returns (Rm-Rf) on the S&P 500 (independent variable, X) to explain the variation in excess returns on
ABC’s ordinary shares (the dependent variable, Y).
Line of best fit!
• Both variables are positively correlated: ABC’s excess
ABC returns tended to be positive (negative) in the same
month that S&P 500 excess returns were positive (negative).
• Anomaly! At S & P at -7.8%, ABC is approx. + 1.1%
