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Level III
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Capital Market Expectations
Capital Market Expectations
Hard
An analyst discovers a strong in-sample correlation between a novel sentiment indicator and 6-month forward equity returns (R² = 0.35). She then tests the model on out-of-sample data and finds R² = 0.03. The most appropriate conclusion is that:
A
The in-sample relationship was likely spurious, and the variable should not be used in the CME model
B
The out-of-sample period was too short, and the analyst should extend it to confirm the in-sample finding
C
The model parameters should be re-estimated using the combined in-sample and out-of-sample data
D
The sentiment indicator has genuine predictive power that requires a longer out-of-sample period to manifest
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Tags
#out-of-sample-testing
#data-mining-bias
#model-validation
#overfitting
#analyst-biases
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