A method of fitting a line that relates a dependent variable to one or more explanatory variables. Ordinary least squares picks the coefficients that minimise the sum of squared residuals.
Where you will meet it
Regression comes up in 57 learning outcome notes across the FRM syllabus.
A few of them:
Using Futures for Hedging FRM Part I · Financial markets and products
“Effectiveness is the proportion of variance removed, which is ρ², the regression R².”
Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) FRM Part I · Foundations of risk management
“It is the slope of a regression of the asset's returns on the market's.”
Linear Regression FRM Part I · Quantitative analysis
“Ordinary least squares can estimate any model that is linear in its parameters, even when it is not linear in the variables.”
Operational Risk FRM Part I · Valuation and risk models
“So α is minus the slope, and it can be estimated by regression or from two points: Alpha = ln(p1 ÷ p2) ÷ ln(x2 ÷ x1).”
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