Solution: Selecting Ridge Alpha by CV

Exercise: Selecting Ridge Alpha by CV

Solution

Select alpha 0.1 because it has the lowest validation MSE. Then refit with alpha 0.1 and evaluate once on the test set.

Takeaways

• State the assumption that makes the method valid before trusting the result.
• Connect the computation back to the finance workflow, not only to the code.
• Check whether the result depends on average-case behaviour, validation design, or numerical safeguards.