Question

Suppose that you construct the following regression model to test forecast bias. Y(t) = a + b*X(t-1) + error where y(t) = spot exchange rate at time t and X(t-1) = forecasted exchange rate at time t-1. Test a=0 and b=1 using 1% or 5% statistical significance level. Regression results: a b estimated coefficient 0.053 1.197 p-value 0.291 0.365 Based on the results, explain whether forecasted values are biased (overestimated or understimated) or unbiased and why. (You don't need any equation or calculation)

Answer 1

Kindly Note: I am answering the 2nd question only as the 1st question belongs to the area of Statistics. Kindly post the 1st question under Statistics for the relevant subject expert to answer it.

Answer: Based on the data provided for Glovanskia, we are first required to use the ratings and weights assigned to the 2 Political Risk Factors to calculate the weighted average Political Risk Rating. Similarly, we will use the ratings and weights assigned to the 5 Financial Risk Factors to calculate the weighted average Financial Risk Rating.

Weighted Average Political Risk Rating = (Weight for Blockage of fund transfers * Rating for Blockage of fund transfers) + (Weight for Bureaucracy * Rating for Bureaucracy) = (40% * 5) + (60% * 3) = 2.0 + 1.8 = 3.8

Weighted Average Financial Risk Rating = (Weight for Interest Rate * Rating for Interest Rate) + (Weight for Inflation * Rating for Inflation) + (Weight for Exchange Rate * Rating for Exchange Rate) + (Weight for Competition * Rating for Competition) + (Weight for Growth * Rating for Growth) = (20% * 5) + (20% * 5) + (20% * 3) + (10% * 2) + (30% * 5) = 1.0 + 1.0 + 0.6 + 0.2 + 1.5 = 4.3

Now, since Assauer has assigned a weightage of 30% to Political Risk factors and 70% to Financial Risk factors, the Country Risk will be a weighted average of these two as shown below:

Country Risk = (Weight for Political Risk factors * Weighted Average Political Risk Rating) + (Weight for Financial Risk factors * Weighted Average Financial Risk Rating) = (30% * 3.8) + (70% * 4.3) = 1.14 + 3.01 = 4.15

Since Assauer is willing to consider Glovanskia for investment if Country Risk is above 4, and the Country Risk has come out to be 4.15, Assauer should consider Glovanskia for investment.