Vignette: Vicky Lazo works as an analyst for Cappa Securities. Vicky has been assigned the task of measuring and predicting returns for the firm's portfolios.
The following information has been gathered with regard to the firm's growth fund's monthly returns from January 20x1 to June 20x3.
Rt = -.0018 + 1.20R − Lt + .75R − St + Et
(1.524) (2.965) (2.025)
Where:
Rt = % return in month t on the large cap fund
R - Lt = % return in month t on the large cap stock index
R - St = % return in month t on the small cap stock index
Et = regression error in month t
Regression sum of squares = 1,150
Error sum of squares = 350
Durbin Watson statistic = 1.25
R2 = 63%
F-statistic = 35.80
Corr(R-L, R-S) = .73
Predicted large cap index return for July 20x3 = 2.5%
Predicted small cap index return for July 20x3 = 4.5%
Also, assume a second regression is run in which:
e2-t = .025 + .03R − Lt + .02R − St
(2.93)(3.15)(4.30)
Question: Which of the following is correct regarding serial correlation?
I. Serial correlation can cause erroneous statistical inference.
II. Serial correlation can be corrected by adjusting the coefficient standard errors.
III. The null hypothesis must be rejected due to serial correlation.
IV. Serial correlation refers to correlation among the dependent variables.
Select an Answer: I, II, III, and IV III and IV I and II III
Rationale:
Serial correlation refers to correlation in the time series observations for the dependent variable therefore IV is correct.
III is correct as the null hypothesis of no serial correlation must be rejected as the Durbin Watson statistic of 1.25 is less than the critical value of 1.28 based on the thirty observations from December 20x1 to June 20x3.
II is correct because a way to correct serial correlation is to adjust the standard errors of the intercept and the slope coefficients.
I is correct because serial correlation can cause erroneous statistical inference.
2026-06-09
Vignette: Samuel Joseph is an equity analyst. He has extracted the following information with respect to a company he is evaluating:
Net income: $20 million
Retention rate: 40%
Total debt/equity ratio: 0.60
Asset turnover ratio: 1.60
Sales: $100 million
Cost of equity: 13%
Joseph estimates that the company will grow at a sustainable rate over the next five years and will maintain its current payout and leverage policy.
Question: The company's shareholders' equity is closest to ________ million.
Select an Answer: $31.4 $27.3 $62.5 $56.2 $37.5 $39.1
Rationale:
From the given information, total assets can be arrived at as:
Total assets = Sales/Asset turnover ratio = $100 million / 1.6 = $62.5 million
Given a debt/equity ratio of 0.6, assuming equity is x:
Total assets = Shareholders' equity + Total debt = x + 0.6x, which is $62.5 million = 1.6x
Shareholders' equity = $62.5 million / 1.6 = $39.06 million
2026-06-08
Question: In a statistical regression estimation, the R2 is found to be 63% and the slope coefficient is 0.6.
The correlation coefficient between the dependent and the independent variables is ________.
Select an Answer: 0.63 0.24 0.60 0.79
Rationale:
In a univariate regression, the correlation coefficient is the square root of the R2. Hence, the correlation coefficient = √0.63 = 0.79.
2026-06-07
Vignette: Rick Jason is an equity analyst. He has extracted the following information with respect to a growth company:
Short-term growth rate: 25%
Short-term growth period: 25 years
Current earnings per share: $4.5
Dividend payout ratio during high growth period: 40%
Forecast ROE during stable growth period: 20%
Forecast payout ratio during stable period: 70%
Cost of equity for the company: 15%
The short-term growth rate of 25% will linearly decline to a sustainable growth of 6% over a period of 25 years.
Question: The sustainable growth rate during the stable period is closest to ________.
Select an Answer: 16% 6% 14% 5.5%
Rationale:
g = b × ROE, wherein b is retention rate.
g = (1 − 0.7) × 20% = 6%
2026-06-06
Vignette: Rick Jason is an equity analyst. He has extracted the following information with respect to a growth company:
Short-term growth rate: 25%
Short-term growth period: 25 years
Current earnings per share: $4.5
Dividend payout ratio during high growth period: 40%
Forecast ROE during stable growth period: 20%
Forecast payout ratio during stable period: 70%
Cost of equity for the company: 15%
The short-term growth rate of 25% will linearly decline to a sustainable growth of 6% over a period of 25 years.
Question: Applying the H-model, the current value of stock is closest to ________.
Select an Answer: $47.50 $116.20 $68.7 $72.50
Rationale:
Value of stock (H-model) = ((Current dividend × (1 + Long-run growth rate)/(Required return − Long-run growth rate)) + ((Current dividend × Half of high-growth period × (High-growth rate − Long-run growth rate)/(Required return − Long-run growth rate))
Current dividend equals $4.5(0.40) or $1.80 per share.
