The final exam will be comprehensive. You should review the material
we covered for exam 1 and exam
2 . You will need a calculator for this exam. I will provide
normal and "t" tables and a list of formulas.
A. Dependent (y) and independent (x) variables
1. Y = a + bX + . . .
B. Ordinary Least Squares
1. best, linear, unbiased estimate
2. computer estimation
C. Hypothesis testing
1. typical test is there a statistically significant
relation between Y and X ?
2. null hypothesis b = 0
3. use standard error of the coefficient to construct
critical region
4. reject if b is outside critical region
5. t-stat = b/s.e. can be a fast method to check
significance
D. Variations on OLS
1. dummy variables
2. transforming non-linear relations to use OLS
a. quadratic terms
b. natural logs
E. R-squared
1. coefficient of determination
2. low R-squared-- lots of unexplained variation
in Y
II. Regression Problems
A. regression does not show causality
B. statistical significance is not the same as real-world importance
a. differences may be non-random (statistical significance)
b. but, size may be very small (unimportant)
C. Data collection must be methodologically sound
1. random sample, representative of population
2. avoid bias in survey questions
3. results are sensitive to extreme values (outliers)
D. Statistical Issues
E. Graphs can be powerful analytic tools
1. data
2. residuals
III. Uncertainty and Probability
A. Knowledge, risk, and decision making
1. lack of information vs. random outcomes
2. classical, relative frequency, subjective probabilities
B. Expected value
1. decision making under uncertainty
2. fair bet
3. calculating expected value
C. Risk
1. measuring risk
a. variance
b. standard deviation
2. Risk aversion
a. no uncompensated risk
b. risk premium
D. Portfolios
1. combinations of random variables
a. E(X+Y) = E(X) + E(Y)
b. VAR(X+Y) = VAR(X) + VAR(Y) + 2 COV(XY)
2. diversification
E. Financial markets and risk
1. Beta
a. compares asset to overall market
b. volatility and correlation
c. regression coefficient
2. Capital Asset Pricing Model (CAPM)
a. risk premium
b. calculations