Predicting the dependent variable

CFA Level II Quant
#1

Given the WPO regression equation:

WPO= -2.3% + (.64) (S&P500)

Calculate the predicted value of WPO excess returns if forecasted S&P returns are 10%

Answer:

WPO = -2.3% + (.64) (10%) = 4.1%

How does this equal 4.1%? I get -2.236% so I’m not sure what I am doing wrong.

#2

-2.3% + (0.64)(10%) = -2.3% + 6.4% = 4.1%.

It appears that you’re using 0.64% instead of 0.64.

#3

or 10% as 0.1. Please see both figures are in percentage. :slight_smile: