Correlation & Regression -Reading 9

CFA Level II Quant
#1

Below is a question from Reading 9 (quantitative) in Schweser:

Cannot get in the answer, what is the midpoint?

Coldplay forecasts the excess return on the S&P 500 for June 2017 to be 5% and the 95% confidence interval for the predicted value of the excess return on VIGRX for June 2017 to be 3.9% to 7.7%. The standard error of the forecast is closest to: A. 0.0080. B. 0.0093. C. 0.0111. This is a tricky question because you are given the confidence interval and its midpoint and asked to solve for the standard error of the forecast (sf). Remember to also convert the percentages to decimals. The critical two-tailed 5% t-value with 34 degrees of freedom is approximately 2.03. The midpoint, or predicted value is 0.0023 +1.1163 × 0.05 = 0.058. Therefore,

#2

The midpoint is your expected excess return (the middle of the confidence intervall). Midpoint for excess return is (3.9%+7.7%)/2 = 5.8%. For the upper value of your confidence intervall you have 5.8% + tc*standard error = 7.7%. Using tc = 2.03 and solving for the standard error gives you: standard error = 0.00936 (B).