Question #1 of 144 Question ID: 1586011

An analyst is estimating whether company sales is related to three economic variables. The
regression exhibits conditional heteroskedasticity, serial correlation, and multicollinearity. The
analyst uses White and Newey-West corrected standard errors. Which of the following is most
accurate?

The regression will still exhibit heteroskedasticity and multicollinearity, but the serial
A)
correlation problem will be solved.
The regression will still exhibit multicollinearity, but the heteroskedasticity and serial
B)
correlation problems will be solved.
The regression will still exhibit serial correlation and multicollinearity, but the
C)
heteroskedasticity problem will be solved.

Question #2 of 144 Question ID: 1471868

Consider the following estimated regression equation, with the standard errors of the slope
coefficients as noted:

Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi – 2.0 COMPi + 8.0 CAPi

where the standard error for the estimated coefficient on R&D is 0.45, the standard
error for the estimated coefficient on ADV is 2.2 , the standard error for the estimated
coefficient on COMP is 0.63, and the standard error for the estimated coefficient on
CAP is 2.5.

The equation was estimated over 40 companies. Using a 5% level of significance, which of the
estimated coefficients are significantly different from zero?

A) ADV and CAP only.

B) R&D, ADV, COMP, and CAP.
C) R&D, COMP, and CAP only.
Question #3 of 144 Question ID: 1479906

Which of the following is least likely a method used to detect heteroskedasticity?

A) Scatter plot.
B) Breusch-Pagan test.
C) Breusch-Godfrey test.

Question #4 of 144 Question ID: 1479913

One of the main assumptions of a multiple regression model is that the variance of the
residuals is constant across all observations in the sample. A violation of the assumption is
most likely to be described as:

A) unstable remnant deviation.

B) positive serial correlation.
C) heteroskedasticity.

Question #5 of 144 Question ID: 1479918

During the course of a multiple regression analysis, an analyst has observed several items that
she believes may render incorrect conclusions. For example, the coefficient standard errors are
too small, although the estimated coefficients are accurate. She believes that these small
standard error terms will result in the computed t-statistics being too big, resulting in too many
Type I errors. The analyst has most likely observed which of the following assumption violations
in her regression analysis?

A) Positive serial correlation.

B) Homoskedasticity.
C) Multicollinearity.
In preparing an analysis of HB Inc., Jack Stumper is asked to look at the company's sales in
relation to broad based economic indicators. Stumper's analysis indicates that HB's monthly
sales are related to changes in housing starts (H) and changes in the mortgage interest rate (M).
The analysis covers the past ten years for these variables. The regression equation is:

S = 1.76 + 0.23H - 0.08M

Number of observations: 123

Unadjusted R2: 0.77

F statistic: 9.80

Durbin Watson statistic 0.50

p-value of Housing Starts 0.017

p=value of Mortgage Rates 0.033

Variable Descriptions

S = HB Sales (in thousands)

H = housing starts (in thousands)

M = mortgage interest rate (in percent)

November 20x6 Actual Data

HB's monthly sales: $55,000

Housing starts: 150,000

Mortgage interest rate (%): 7.5

Question #6 - 11 of 144 Question ID: 1471914

Using the regression model developed, the closest prediction of sales for December 20x6 is:

A) $44,000.
B) $36,000.
C) $55,000.
Question #7 - 11 of 144 Question ID: 1471915

Will Stumper conclude that the housing starts coefficient is statistically different from zero and
how will he interpret it at the 5% significance level:

A) not different from zero; sales will rise by $0 for every 100 house starts.
B) different from zero; sales will rise by $100 for every 23 house starts.
C) different from zero; sales will rise by $23 for every 100 house starts.

Question #8 - 11 of 144 Question ID: 1585998

Is the regression coefficient of changes in mortgage interest rates different from zero at the 5
percent level of significance?

A) no, because coefficient is negative.

B) yes, because p-value < 0.05.
C) yes, because -0.08 < 0.05.

Question #9 - 11 of 144 Question ID: 1471917

In this multiple regression, the F-statistic indicates the:

A) degree of correlation between the independent variables.

B) deviation of the estimated values from the actual values of the dependent variable.
C) the joint significance of the independent variables.

Question #10 - 11 of 144 Question ID: 1471918

The regression statistics above indicate that for the period under study, the independent
variables (housing starts, mortgage interest rate) together explained approximately what
percentage of the variation in the dependent variable (sales)?

A) 9.80.
B) 67.00.
C) 77.00.

Question #11 - 11 of 144 Question ID: 1585999

In this multiple regression, if Stumper discovers that the residuals exhibit positive serial
correlation, the most likely effect is:

A) standard errors are not affected but coefficient estimate is inconsistent.

B) standard errors are too low but coefficient estimate is consistent.
C) standard errors are too high but coefficient estimate is consistent.

Question #12 of 144 Question ID: 1586006

Consider the following estimated regression equation:

AUTOt = 10.0 + 1.25 PIt + 1.0 TEENt – 2.0 INSt

The equation was estimated over 40 companies. The predicted value of AUTO if PI is 4, TEEN is
0.30, and INS = 0.6 is closest to:

A) 14.90.
B) 14.10.
C) 17.50.

Binod Salve, CFA, is investigating the application of the Fama-French three-factor model (Model
1) for the Indian stock market for the period 2001–2011 (120 months). Using the dependent
variable as annualized return (%), the results of the analysis are shown in Indian Equities—
Fama-French Model

Indian Equities—Fama-French Model

Factor Coefficient P-Value VIF

Intercept 1.22 <0.001

SMB 0.23 <0.001 3

HML 0.34 0.003 3

Rm-Rf 0.88 <0.001 2

R-squared 0.36

SSE 38.00

BG (lag 1) 2.11

BG (lag 2) 1.67

Partial F-Table (5% Level of Significance)

Degrees of Freedom Numerator

Degrees of Freedom Denominator
1 2 3

112 3.93 3.08 2.69

113 3.93 3.08 2.68

114 3.92 3.08 2.68

115 3.92 3.08 2.68

116 3.92 3.07 2.68

117 3.92 3.07 2.68

Partial Chi-Square Table (5% Level of Significance)

Degrees of Freedom Critical Value

1 3.84

2 5.99

3 7.81
 4 9.49

5 11.07

6 12.59

Question #13 - 16 of 144 Question ID: 1501597

Salve runs a regression using the squared residuals from the model using the original
dependent variables. The coefficient of determination of this model is 6%. Which of the
following is the most appropriate conclusion at a 5% level of significance?

Because the test statistic of 7.20 is higher than the critical value of 3.84, we reject the
A)
null hypothesis of no conditional heteroskedasticity in residuals.
Because the test statistic of 7.20 is lower than the critical value of 7.81, we fail to reject
B)
the null hypothesis of no conditional heteroskedasticity in residuals.
Because the test statistic of 3.60 is lower than the critical value of 3.84, we reject the
C)
null hypothesis of no conditional heteroskedasticity in residuals.

Question #14 - 16 of 144 Question ID: 1501598

Which of the following misspecifications is most likely to cause serial correlation in residuals?

A) Data improperly pooled.

B) Improper variable scaling.
C) Improper variable form.

Question #15 - 16 of 144 Question ID: 1501599

Should Salve be concerned about residual serial correlation?

A) Yes, for one lag only.

B) Yes, for two lags only.
C) No.

Question #16 - 16 of 144 Question ID: 1501600

Should Salve be concerned about residual multicollinearity?

A) Yes, and Salve should exclude either variable SMB or HML from the model.
B) Yes, and Salve should exclude variable Rm-Rf from the model.
C) No.

Question #17 of 144 Question ID: 1479903

When constructing a regression model to predict portfolio returns, an analyst runs a regression
for the past five year period. After examining the results, she determines that an increase in
interest rates two years ago had a significant impact on portfolio results for the time of the
increase until the present. By performing a regression over two separate time periods, the
analyst would be attempting to prevent which type of misspecification?

A) Incorrectly pooling data.

B) Inappropriate variable scaling.
C) Inappropriate variable form.

Autumn Voiku is attempting to forecast sales for Brookfield Farms based on a multiple
regression model. Voiku has constructed the following model:

sales = b0 + (b1 × CPI) + (b2 × IP) + (b3 × GDP) + εt

Where:

sales = $ change in sales (in 000's)

CPI = change in the consumer price index

IP = change in industrial production (millions)

 GDP = change in GDP (millions)

All changes in variables are in percentage terms.

Voiku uses monthly data from the previous 180 months of sales data and for the independent
variables. The model estimates (with coefficient standard errors in parentheses) are:

SALES = 10.2 + (4.6 × CPI) + (5.2 × IP) + (11.7 × GDP)

p-value 0.001 0.17 0.11 0.09

The sum of squared errors is 140.3 and the total sum of squares is 368.7.

Voiku is concerned that one or more of the assumptions underlying multiple regression has
been violated in her analysis. In a conversation with Dave Grimbles, CFA, a colleague who is
considered by many in the firm to be a quant specialist, Voiku says, "It is my understanding that
there are five assumptions of a multiple regression model:"

There is a linear relationship between the dependent and independent

Assumption 1:
variables.

The independent variables are not random, and there is zero correlation
Assumption 2:
between any two of the independent variables.

Assumption 3: The residual term is normally distributed with an expected value of zero.

Assumption 4: The residuals are serially correlated.

Assumption 5: The variance of the residuals is constant.

Grimbles agrees with Miller's assessment of the assumptions of multiple regression.

Voiku tests and fails to reject each of the following four null hypotheses at the 99% confidence
interval:

Hypothesis 1: The coefficient on GDP is negative.

Hypothesis 2: The intercept term is equal to –4.

A 2.6% increase in the CPI will result in an increase in sales of more than
Hypothesis 3:
12.0%.

A 1% increase in industrial production will result in a 1% decrease in

Hypothesis 4:
sales.
Figure 1: Partial F-Table critical values for right-hand tail area equal to 0.05

df1 = 1 df1 = 3 df1 = 5

df2 = 170 3.90 2.66 2.27

df2 = 176 3.89 2.66 2.27

df2 = 180 3.89 2.65 2.26

Question #18 - 20 of 144 Question ID: 1471907

Concerning the assumptions of multiple regression, Grimbles is:

A) correct to agree with Voiku’s list of assumptions.

incorrect to agree with Voiku’s list of assumptions because one of the assumptions is
B)
stated incorrectly.
incorrect to agree with Voiku’s list of assumptions because two of the assumptions are
C)
stated incorrectly.

Question #19 - 20 of 144 Question ID: 1471909

The most appropriate decision with regard to the F-statistic for testing the null hypothesis that
all of the independent variables are simultaneously equal to zero at the 5 percent significance
level is to:

reject the null hypothesis because the F-statistic is larger than the critical F-value of
A)
2.66.
reject the null hypothesis because the F-statistic is larger than the critical F-value of
B)
3.19.
fail to reject the null hypothesis because the F-statistic is smaller than the critical F-
C)
value of 2.66.
Question #20 - 20 of 144 Question ID: 1585996

The multiple regression, as specified, most likely suffers from:

A) heteroskedasticity.
B) multicollinearity.
C) serial correlation of the error terms.

Question #21 of 144 Question ID: 1586002

Which of the following statements regarding the R2 is least accurate?

The R2 of a regression will be greater than or equal to the adjusted-R2 for the same
A)
regression.

B) R2 is the coefficient of determination of the regression.

The R2 is the ratio of the unexplained variation to the explained variation of the
C)
dependent variable.

In preparing an analysis of Treefell Company, Jack Lumber is asked to look at the company's
sales in relation to broad-based economic indicators. Lumber's analysis indicates that Treefell's
monthly sales are related to changes in housing starts (H) and changes in the mortgage interest
rate (M). The analysis covers the past 10 years for these variables. The regression equation is:

S = 1.76 + 0.23H – 0.08M

Number of observations: 123

Unadjusted R2: 0.77

F-statistic: 9.80

Durbin-Watson statistic: 0.50

p-value of Housing Starts: 0.017

t-stat of Mortgage Rates: –2.6

Variable Descriptions

S = Treefell Sales (in thousands)

H = housing starts (in thousands)

M = mortgage interest rate (in percent)

November 20X6 Actual Data

Treefell's monthly sales: $55,000

Housing starts: 150,000

Mortgage interest rate (%): 7.5

Partial Chi-Square Table (5% Level of Significance)

Degrees of Freedom Critical Value

1 3.84

2 5.99

3 7.81

4 9.49

5 11.07

6 12.59

Question #22 - 26 of 144 Question ID: 1472050

Using the regression model developed, the closest prediction of sales for December 20X6 is:
A) $36,000.
B) $55,000.
C) $44,000.

Question #23 - 26 of 144 Question ID: 1489312

Will Jack conclude that the housing starts coefficient is statistically different from zero and how
will he interpret it at the 5% significance level?

A) Different from zero; sales will rise by $100 for every 23 house starts.
B) Not different from zero; sales will rise by $0 for every 100 house starts.
C) Different from zero; sales will rise by $23 for every 100 house starts.

Question #24 - 26 of 144 Question ID: 1479916

In this multiple regression, the F-statistic indicates the:

A) the joint significance of the independent variables.

B) degree of correlation between the independent variables.
C) deviation of the estimated values from the actual values of the dependent variable.

Question #25 - 26 of 144 Question ID: 1472054

The regression statistics indicate that for the period under study, the independent variables
(housing starts, mortgage interest rate) together explain approximately what percentage of the
variation in the dependent variable (sales)?

A) 67.00.
B) 9.80.
C) 77.00.
Question #26 - 26 of 144 Question ID: 1484386

For this question only, assume that the regression of squared residuals on the independent
variables has R2 = 11%. At a 5% level of significance, which of the following conclusions is most
accurate?

Because the critical value is 3.84, we reject the null hypothesis of no conditional
A)
heteroskedasticity.
With a test statistic of 13.53, we can conclude the presence of conditional
B)
heteroskedasticity.
With a test statistic of 0.22, we cannot reject the null hypothesis of no conditional
C)
heteroskedasticity.

Manuel Mercado, CFA has performed the following two regressions on sales data for a given
industry. He wants to forecast sales for each quarter of the upcoming year.

Model ONE

Regression Statistics

Multiple R 0.941828

R2 0.887039

Adjusted R2 0.863258

Standard Error 2.543272

Observations 24

Durbin-Watson test statistic = 0.7856

ANOVA

df SS MS F Significance F

Regression 4 965.0619 241.2655 37.30006 9.49E−09

Residual 19 122.8964 6.4682

Total 23 1087.9583

Coefficients Standard Error t-Statistic

Intercept 31.40833 1.4866 21.12763

Q1 −3.77798 1.485952 −2.54246

Q2 −2.46310 1.476204 −1.66853

Q3 −0.14821 1.470324 −0.10080

TREND 0.851786 0.075335 11.20848

Model TWO

Regression Statistics

Multiple R 0.941796

R2 0.886979

Adjusted R2 0.870026

Standard Error 2.479538

Observations 24

Durbin-Watson test statistic = 0.7860

df SS MS F Significance F

Regression 3 964.9962 321.6654 52.3194 1.19E−09

Residual 20 122.9622 6.14811

Total 23 1087.9584

Coefficients Standard Error t-Statistic

Intercept 31.32888 1.228865 25.49416

Q1 −3.70288 1.253493 −2.95405

Q2 −2.38839 1.244727 −1.91881

TREND 0.85218 0.073991 11.51732

The dependent variable is the level of sales for each quarter, in $ millions, which began with the
first quarter of the first year. Q1, Q2, and Q3 are seasonal dummy variables representing each
quarter of the year. For the first four observations the dummy variables are as follows: Q1:
(1,0,0,0), Q2:(0,1,0,0), Q3:(0,0,1,0). The TREND is a series that begins with one and increases by
one each period to end with 24. For all tests, Mercado will use a 5% level of significance. Tests
of coefficients will be two-tailed, and all others are one-tailed.

Question #27 - 31 of 144 Question ID: 1636800

Which model would be a better choice for making a forecast?

A) Model TWO because it has a higher adjusted R2.

B) Model TWO because serial correlation is not a problem.

C) Model ONE because it has a higher R2.

Question #28 - 31 of 144 Question ID: 1479951

Using Model ONE, what is the sales forecast for the second quarter of the next year?

A) $51.09 million.
B) $46.31 million.
C) $56.02 million.

Question #29 - 31 of 144 Question ID: 1479952

Which model misspecification is most likely to cause multicollinearity?

A) Inappropriate variable form.

B) Ommission of important variable(s).
C) Inappropriate variable scaling.
Question #30 - 31 of 144 Question ID: 1479953

If it is determined that conditional heteroskedasticity is present in model one, which of the

following inferences are most accurate?

A) Regression coefficients will be unbiased but standard errors will be biased.

B) Both the regression coefficients and the standard errors will be biased.
C) Regression coefficients will be biased but standard errors will be unbiased.

Question #31 - 31 of 144 Question ID: 1479955

If Mercado determines that Model TWO is the appropriate specification, then he is essentially
saying that for each year, value of sales from quarter three to four is expected to:

A) grow by more than $1,000,000.

B) remain approximately the same.
C) grow, but by less than $1,000,000.

Phillip Lee works for Song Bank as a quantitative analyst. He is currently working on a model to
explain the returns (in %) of 20 hedge funds for the past year. He includes three independent
variables:

Market return = return on a broad-based stock index (in %)

Closed = dummy variable (= 1 if the fund is closed to new investors; 0 otherwise)
Prior period alpha = fund return for the prior 12 months – return on market (in %)

Estimated model: hedge fund return = 3.2 + 0.22 market return + 1.65 closed – 0.11 prior period
alpha

Additionally, Lee wants to estimate the probability of a hedge fund closing to new investors,
and he uses two variables:

Fund size = log of assets under management

Prior period alpha (defined earlier)

Results are shown as follows:

 Variable Coefficient

Intercept –3.76

Fund size –2.98

Prior period alpha –2.99

Question #32 - 34 of 144 Question ID: 1710719

What is the correct interpretation of the coefficient of closed in the first regression?

A) If a model is closed to new investors, the expected excess fund return is 1.65%.
B) A closed fund is likely to generate a return of 1.65%.
A closed fund is estimated to have an extra return of 1.65% relative to funds that are
C)
not closed.

Question #33 - 34 of 144 Question ID: 1710720

To check for only the outliers in the sample, Lee should most appropriately use:

A) Studentized residuals.
B) leverage.
C) Breusch-Pagan statistic.

Question #34 - 34 of 144 Question ID: 1710721

Which of the following is least accurate statement about logit models?

A) Logistic regression (logit) models use log odds as the dependent variable.
B) A logit model assumes that residuals have a normal distribution.
The coefficients of the logit model are estimated using the maximum likelihood
C)
estimation methodology.
Ben Sasse is a quantitative analyst at Gurnop Asset Managers. Sasse is interviewing Victor
Sophie for a junior analyst position. Sasse mentions that the firm currently uses several
proprietary multiple regression models and wants Sophie's opinion about regression models.

Sophie makes the following statements:

Statement 1: Multiple regression models can be used to forecast independent

variables.

Statement 2: Multiple regression models can be used to test existing theories of

relationships among variables.

Sasse then discusses a model that the firm uses to forecast credit spread on investment-grade
corporate bonds. Sasse states that while the current model parameters are a secret, the
following is an older version of the model:

CSP = 0.22 + 1.04 × DSC – 0.32 × index + 1.33 × D/E

where:

CSP = credit spread (%)

DSC = EBITDA / unsecured debt

index = 1 if the issuer is part of CDX index; 0 otherwise

D/E = long-term debt / equity

Question #35 - 38 of 144 Question ID: 1501587

Regarding Sophie's statement on multiple regression:

A) only Statement 1 is correct.

B) only Statement 2 is correct.
C) both statements are correct.

Question #36 - 38 of 144 Question ID: 1501588

Based on the credit spread model, if an issuer gets included in the CDX index and assuming
everything else the same, which of the following statements most accurately describes the
model's forecast?

A) The credit spread on the firm’s issue would decrease by 10 bps.

B) The credit spread on the firm’s issue will increase by 32 bps.
C) The credit spread on the firm’s issue will decrease by 32 bps.

Question #37 - 38 of 144 Question ID: 1501589

Which of the following is least likely an assumption of multiple linear regression?

A) The dependent variable is not serially correlated.

B) There is no linear relationship between the independent variables.
C) The error term is normally distributed.

Question #38 - 38 of 144 Question ID: 1501590

Which assumption of multiple regression is most likely evaluated using a QQ plot?

A) Serial correlation of residuals.

B) Conditional heteroskedasticity.
C) Error term is normally distributed.

Question #39 of 144 Question ID: 1479867

Jason Fye, CFA, wants to check for seasonality in monthly stock returns (i.e., the January effect)
after controlling for market cap and systematic risk. The type of model that Fye would most
appropriately select is:

A) Neither multiple regression nor logistic regression.

B) Multiple regression model.
C) logistic regression model.

Question #40 of 144 Question ID: 1630876

One choice a researcher can use to test for nonstationarity is to use a:

A) Breusch-Pagan test, which uses a modified t-statistic.

B) Dickey-Fuller test, which uses a modified t-statistic.

C) Dickey-Fuller test, which uses a modified χ2 statistic.

Toni Williams, CFA, has determined that commercial electric generator sales in the Midwest U.S.
for Self-Start Company is a function of several factors in each area: the cost of heating oil, the
temperature, snowfall, and housing starts. Using data for the most currently available year, she
runs a cross-sectional regression where she regresses the deviation of sales from the historical
average in each area on the deviation of each explanatory variable from the historical average
of that variable for that location. She feels this is the most appropriate method since each
geographic area will have different average values for the inputs, and the model can explain
how current conditions explain how generator sales are higher or lower from the historical
average in each area. In summary, she regresses current sales for each area minus its
respective historical average on the following variables for each area.

The difference between the retail price of heating oil and its historical average.
The mean number of degrees the temperature is below normal in Chicago.
The amount of snowfall above the average.
The percentage of housing starts above the average.

Williams used a sample of 26 observations obtained from 26 metropolitan areas in the Midwest
U.S. The results are in the tables below. The dependent variable is in sales of generators in
millions of dollars.

Coefficient Estimates Table

Standard Error of the

Variable Estimated Coefficient
Coefficient
 Intercept 5.00 1.850

$ Heating Oil 2.00 0.827

Low Temperature 3.00 1.200

Snowfall 10.00 4.833

Housing Starts 5.00 2.333

Analysis of Variance Table (ANOVA)

Source Degrees of Freedom Sum of Squares Mean Square

Regression 4 335.20 83.80

Error 21 606.40 28.88

Total 25 941.60

Table of the F-Distribution

Critical values for right-hand tail area equal to 0.05

Numerator: df1 and Denominator: df2

df1

df2 1 2 4 10 20

1 161.45 199.50 224.58 241.88 248.01

2 18.513 19.000 19.247 19.396 19.446

4 7.7086 6.9443 6.3882 5.9644 5.8025

10 4.9646 4.1028 3.4780 2.9782 2.7740

20 4.3512 3.4928 2.8661 2.3479 2.1242

One of her goals is to forecast the sales of the Chicago metropolitan area next year. For that
area and for the upcoming year, Williams obtains the following projections: heating oil prices
will be $0.10 above average, the temperature in Chicago will be 5 degrees below normal,
snowfall will be 3 inches above average, and housing starts will be 3% below average.

In addition to making forecasts and testing the significance of the estimated coefficients, she
plans to perform diagnostic tests to verify the validity of the model's results.
Question #41 - 45 of 144 Question ID: 1471970

According to the model and the data for the Chicago metropolitan area, the forecast of
generator sales is:

A) $65 million above the average.

B) $35.2 million above the average.
C) $55 million above average.

Question #42 - 45 of 144 Question ID: 1479876

Williams proceeds to test the hypothesis that none of the independent variables has significant
explanatory power. Using the joint F-test for the significance of all slope coefficients, at a 5%
level of significance:

A) all of the independent variables have explanatory power.

B) none of the independent variables has explanatory power.
C) at least one of the independent variables has explanatory power.

Question #43 - 45 of 144 Question ID: 1479877

With respect to testing the validity of the model's results, Williams may wish to perform:

A) both a Breusch-Godfrey test and a Breusch-Pagan test.

B) a Breusch-Pagan test, but not Breusch-Godfrey.
C) a Breusch-Godfrey test, but not a Breusch-Pagan test.

Question #44 - 45 of 144 Question ID: 1471974

When Williams ran the model, the computer said the R2 is 0.233. She examines the other
output and concludes that this is the:

A) neither the unadjusted nor adjusted R2 value, nor the coefficient of correlation.

B) unadjusted R2 value.

C) adjusted R2 value.

Question #45 - 45 of 144 Question ID: 1471975

In preparing and using this model, Williams has least likely relied on which of the following
assumptions?

A) The residuals are homoscedastic.

B) The disturbance or error term is normally distributed.
C) There is a linear relationship between the independent variables.

Question #46 of 144 Question ID: 1479901

A multiple regression model has included independent variables that are not linearly related to
the dependent variable. The model is most likely misspecified due to:

A) incorrect data pooling.

B) incorrect variable form.
C) incorrect variable scaling.

Question #47 of 144 Question ID: 1471870

Consider the following regression equation:

Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi – 2.0 COMPi + 8.0 CAPi

where Sales is dollar sales in millions, R&D is research and development expenditures
in millions, ADV is dollar amount spent on advertising in millions, COMP is the
number of competitors in the industry, and CAP is the capital expenditures for the
period in millions of dollars.

Which of the following is NOT a correct interpretation of this regression information?

If R&D and advertising expenditures are $1 million each, there are 5 competitors, and
A)
capital expenditures are $2 million, expected Sales are $8.25 million.
If a company spends $1 million more on capital expenditures (holding everything else
B)
constant), Sales are expected to increase by $8.0 million.
One more competitor will mean $2 million less in Sales (holding everything else
C)
constant).

Question #48 of 144 Question ID: 1479883

One possible problem that could jeopardize the validity of the employment growth rate model
is multicollinearity. Which of the following would most likely suggest the existence of
multicollinearity?

A) The variance of the observations has increased over time.

B) The Durbin–Watson statistic is significant.
The F-statistic suggests that the overall regression is significant, however the
C)
regression coefficients are not individually significant.

Question #49 of 144 Question ID: 1586005

Consider the following estimated regression equation:

Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi − 2.0 COMPi + 8.0 CAPi

Sales are in millions of dollars. An analyst is given the following predictions on the independent
variables: R&D = 5, ADV = 4, COMP = 10, and CAP = 40.

The predicted level of sales is closest to:

A) $310.25 million.
B) $300.25 million.
C) $320.25 million.

Question #50 of 144 Question ID: 1479902

When pooling the samples over multiple economic environments in a multiple regression
model, which of the following errors is most likely to occur?

A) Model misspecification.
B) Heteroskedasticity.
C) Multicollinearity.

Question #51 of 144 Question ID: 1472067

An analyst runs a regression of portfolio returns on three independent variables. These

independent variables are price-to-sales (P/S), price-to-cash flow (P/CF), and price-to-book (P/B).
The analyst discovers that the p-values for each independent variable are relatively
high. However, the F-test has a very small p-value. The analyst is puzzled and tries to figure out
how the F-test can be statistically significant when the individual independent variables are not
significant. What violation of regression analysis has occurred?

A) multicollinearity.
B) conditional heteroskedasticity.
C) serial correlation.
Question #52 of 144 Question ID: 1472012

Which of the following statements regarding heteroskedasticity is least accurate?

A) Heteroskedasticity may occur in cross-sectional or time-series analyses.

Heteroskedasticity results in an estimated variance that is too small and, therefore,
B)
affects statistical inference.
C) The assumption of linear regression is that the residuals are heteroskedastic.

Question #53 of 144 Question ID: 1586003

May Jones estimated a regression that produced the following analysis of variance (ANOVA)
table:

Source Sum of squares Degrees of freedom Mean square

Regression 20 1 20

Error 80 40 2

Total 100 41

The values of R2 and the F-statistic for joint test of significance of all the slope coefficients are:

A) R2 = 0.25 and F = 0.909.

B) R2 = 0.20 and F = 10.

C) R2 = 0.25 and F = 10.

A real estate agent wants to develop a model to predict the selling price of a home. The agent
believes that the most important variables in determining the price of a house are its size (in
square feet) and the number of bedrooms. Accordingly, he takes a random sample of 32 homes
that has recently been sold. The results of the regression are:

Coefficient Standard Error t-statistics

 Intercept 66,500 59,292 1.12

House Size 74.30 21.11 3.52

Number of Bedrooms 10306 3230 3.19

R2 = 0.56; F = 40.73

Selected F- table values for significance level of 0.05:

1 2

28 4.20 3.34

29 4.18 3.33

30 4.17 3.32

32 4.15 3.29

(Degrees of freedom for the numerator in columns; Degrees of freedom for the
denominator in rows)

Additional information regarding this multiple regression:

1. Variance of error is not constant across the 32 observations.

2. The two variables (size of the house and the number of bedrooms) are highly correlated.
3. The error variance is not correlated with the size of the house nor with the number of
bedrooms.

Question #54 - 56 of 144 Question ID: 1479936

The predicted price of a house that has 2,000 square feet of space and 4 bedrooms is closest
to:

A) $114,000.
B) $256,000.
C) $185,000.
Question #55 - 56 of 144 Question ID: 1479937

The conclusion from the hypothesis test of H0: b1 = b2 = 0, is that the null hypothesis should:

A) not be rejected as the calculated F of 40.73 is greater than the critical value of 3.29.
B) be rejected as the calculated F of 40.73 is greater than the critical value of 3.33.
C) be rejected as the calculated F of 40.73 is greater than the critical value of 3.29.

Question #56 - 56 of 144 Question ID: 1479938

Which of the following is most likely to present a problem in using this regression for
forecasting?

A) Heteroskedasticity.
B) Multicollinearity.
C) Autocorrelation.

Question #57 of 144 Question ID: 1471872

Henry Hilton, CFA, is undertaking an analysis of the bicycle industry. He hypothesizes that
bicycle sales (SALES) are a function of three factors: the population under 20 (POP), the level of
disposable income (INCOME), and the number of dollars spent on advertising (ADV). All data are
measured in millions of units. Hilton gathers data for the last 20 years and estimates the
following equation (standard errors in parentheses):

SALES = α + 0.004 POP + 1.031 INCOME + 2.002 ADV

(0.005) (0.337) (2.312)

The critical t-statistic for a 95% confidence level is 2.120. Which of the independent variables is
statistically different from zero at the 95% confidence level?

A) INCOME and ADV.

B) ADV only.
C) INCOME only.

Question #58 of 144 Question ID: 1489310

Jacob Warner, CFA, is evaluating a regression analysis recently published in a trade journal that
hypothesizes that the annual performance of the S&P 500 stock index can be explained by
movements in the Federal Funds rate and the U.S. Producer Price Index (PPI). Which of the
following statements regarding his analysis is most accurate?

If the p-value of a variable is less than the significance level, the null hypothesis can be
A)
rejected.
If the t-value of a variable is less than the significance level, the null hypothesis should
B)
be rejected.
If the p-value of a variable is less than the significance level, the null hypothesis cannot
C)
be rejected.

Question #59 of 144 Question ID: 1472026

Which of the following statements regarding serial correlation that might be encountered in
regression analysis is least accurate?

A) Serial correlation occurs least often with time series data.

B) Serial correlation does not affect consistency of regression coefficients.
C) Positive serial correlation and heteroskedasticity can both lead to Type I errors.

Question #60 of 144 Question ID: 1479923

Assume that in a particular multiple regression model, it is determined that the error terms are
uncorrelated with each other. Which of the following statements is most accurate?
 Serial correlation may be present in this multiple regression model, and can be
A)
confirmed only through a Durbin-Watson test.
This model is in accordance with the basic assumptions of multiple regression analysis
B)
because the errors are not serially correlated.
Unconditional heteroskedasticity present in this model should not pose a problem, but
C)
can be corrected by using robust standard errors.

Question #61 of 144 Question ID: 1471980

An analyst runs a regression of monthly value-stock returns on five independent variables over
48 months. The total sum of squares is 430, and the sum of squared errors is 170. Test the null
hypothesis at the 2.5% and 5% significance level that all five of the independent variables are
equal to zero.

A) Rejected at 5% significance only.

B) Rejected at 2.5% significance and 5% significance.
C) Not rejected at 2.5% or 5.0% significance.

Question #62 of 144 Question ID: 1479874

Wilson estimated a regression that produced the following analysis of variance (ANOVA) table:

Source Sum of squares Degrees of freedom Mean square

Regression 100 1 100.0

Error 300 40 7.5

Total 400 41

The values of R2 and the F-statistic to test the null hypothesis that slope coefficients on all
variables are equal to zero are:

A) R2 = 0.20 and F = 13.333.

B) R2 = 0.25 and F = 0.930.

C) R2 = 0.25 and F = 13.333.

Miles Mason, CFA, works for ABC Capital, a large money management company based in New
York. Mason has several years of experience as a financial analyst, but is currently working in
the marketing department developing materials to be used by ABC's sales team for both
existing and prospective clients. ABC Capital's client base consists primarily of large net worth
individuals and Fortune 500 companies. ABC invests its clients' money in both publicly traded
mutual funds as well as its own investment funds that are managed in-house. Five years ago,
roughly half of its assets under management were invested in the publicly traded mutual funds,
with the remaining half in the funds managed by ABC's investment team. Currently,
approximately 75% of ABC's assets under management are invested in publicly traded funds,
with the remaining 25% being distributed among ABC's private funds. The managing partners at
ABC would like to shift more of its client's assets away from publicly traded funds into ABC's
proprietary funds, ultimately returning to a 50/50 split of assets between publicly traded funds
and ABC funds. There are three key reasons for this shift in the firm's asset base. First, ABC's in-
house funds have outperformed other funds consistently for the past five years. Second, ABC
can offer its clients a reduced fee structure on funds managed in-house relative to other
publicly traded funds. Lastly, ABC has recently hired a top fund manager away from a
competing investment company and would like to increase his assets under management.

ABC Capital's upper management requested that current clients be surveyed in order to
determine the cause of the shift of assets away from ABC funds. Results of the survey indicated
that clients feel there is a lack of information regarding ABC's funds. Clients would like to see
extensive information about ABC's past performance, as well as a sensitivity analysis showing
how the funds will perform in varying market scenarios. Mason is part of a team that has been
charged by upper management to create a marketing program to present to both current and
potential clients of ABC. He needs to be able to demonstrate a history of strong performance
for the ABC funds, and, while not promising any measure of future performance, project
possible return scenarios. He decides to conduct a regression analysis on all of ABC's in-house
funds. He is going to use 12 independent economic variables in order to predict each particular
fund's return. Mason is very aware of the many factors that could minimize the effectiveness of
his regression model, and if any are present, he knows he must determine if any corrective
actions are necessary. Mason is using a sample size of 121 monthly returns.
Question #63 - 65 of 144 Question ID: 1508634

Which of the following tests is least likely to be used to detect autocorrelation?

A) Durbin-Watson.
B) Breusch-Godfrey.
C) Breusch-Pagan.

Question #64 - 65 of 144 Question ID: 1472023

One of the most popular ways to correct heteroskedasticity is to:

A) improve the specification of the model.

B) adjust the standard errors.
C) use robust standard errors.

Question #65 - 65 of 144 Question ID: 1479933

If a regression equation shows that no individual t-tests are significant, but the F-statistic is
significant, the regression probably exhibits:

A) serial correlation.
B) multicollinearity.
C) heteroskedasticity.

Question #66 of 144 Question ID: 1472073

A fund has changed managers twice during the past 10 years. An analyst wishes to measure
whether either of the changes in managers has had an impact on performance. R is the return
on the fund, and M is the return on a market index. Which of the following regression
equations can appropriately measure the desired impacts?
A) The desired impact cannot be measured.
R = a + bM + c1D1 + c2D2 + ε, where D1 = 1 if the return is from the first manager, and
B)
D2 = 1 if the return is from the third manager.

R = a + bM + c1D1 + c2D2 + c3D3 + ε, where D1 = 1 if the return is from the first

C) manager, and D2 = 1 if the return is from the second manager, and D3 = 1 is the return
is from the third manager.

Question #67 of 144 Question ID: 1471869

Consider the following regression equation:

Salesi = 20.5 + 1.5 R&Di + 2.5 ADVi – 3.0 COMPi

where Sales is dollar sales in millions, R&D is research and development expenditures
in millions, ADV is dollar amount spent on advertising in millions, and COMP is the
number of competitors in the industry.

Which of the following is NOT a correct interpretation of this regression information?

If R&D and advertising expenditures are $1 million each and there are 5 competitors,
A)
expected sales are $9.5 million.
One more competitor will mean $3 million less in sales (holding everything else
B)
constant).
If a company spends $1 more on R&D (holding everything else constant), sales are
C)
expected to increase by $1.5 million.

Question #68 of 144 Question ID: 1479922

Which of the following is a potential remedy for multicollinearity?

A) Add dummy variables to the regression.

B) Take first differences of the dependent variable.
C) Omit one or more of the collinear variables.
Question #69 of 144 Question ID: 1586007

Which of the following conditions will least likely affect the statistical inference about
regression parameters by itself?

A) Multicollinearity.
B) Unconditional heteroskedasticity.
C) Model misspecification.

Peter Pun, an enrolled candidate for the CFA Level II examination, has decided to perform a
calendar test to examine whether there is any abnormal return associated with investments
and disinvestments made in blue-chip stocks on particular days of the week. As a proxy for
blue-chips, he has decided to use the S&P 500 Index. The analysis will involve the use of dummy
variables and is based on the past 780 trading days. Here are selected findings of his study:

RSS 0.0039

SSE 0.9534

SST 0.9573

R-squared 0.004

SEE 0.035

Jessica Jones, CFA, a friend of Peter, overhears that he is interested in regression analysis and
warns him that whenever heteroskedasticity is present in multiple regression, it could
undermine the regression results. She mentions that one easy way to spot conditional
heteroskedasticity is through a scatter plot, but she adds that there is a more formal test.
Unfortunately, she can't quite remember its name. Jessica believes that heteroskedasticity can
be rectified using White-corrected standard errors. Her son Jonathan who has also taken part in
the discussion, hears this comment and argues that White corrections would typically reduce
the number of Type I errors in financial data.

Question #70 - 73 of 144 Question ID: 1685256

What is most likely represented by the Y intercept of the regression?

A) The drift of a random walk.

B) The return on a particular trading day.
C) The intercept is not a driver of returns, only the independent variables.

Question #71 - 73 of 144 Question ID: 1479957

What can be said of the overall explanatory power of the model at the 5% significance?

A) There is no value to calendar trading.

B) There is value to calendar trading.
The coefficient of determination for the above regression is significantly higher than
C)
the standard error of the estimate, and therefore there is value to calendar trading.

Question #72 - 73 of 144 Question ID: 1472059

The test mentioned by Jessica is known as the:

A) Breusch-Pagan, which is a one-tailed test.

B) Breusch-Pagan, which is a two-tailed test.
C) Durbin-Watson, which is a two-tailed test.

Question #73 - 73 of 144 Question ID: 1479958

Are Jessica and her son Jonathan correct in terms of the method used to correct for
heteroskedasticity and the likely effects?

A) Neither is correct.
B) Both are correct.
C) One is correct.

Vijay Shapule, CFA, is investigating the application of the Fama-French three-factor model
(Model 1) for the Indian stock market for the period 2001–2011 (120 months). Using the
dependent variable as annualized return (%), the results of the analysis are shown in Indian
Equities—Fama-French Model.

Indian Equities—Fama-French Model

Factor Coefficient P-Value

Intercept 1.22 <0.001

SMB 0.23 <0.001

HML 0.34 0.003

Rm-Rf 0.88 <0.001

R-squared 0.36

SSE 38.00

AIC –129.99

BIC –118.84

Shapule then modifies the model to include a liquidity factor. Results for this four-factor model
(Model 2) are shown in Revised Fama-French Model With Liquidity Factor

Revised Fama-French Model With Liquidity Factor

Factor Coefficient P-Value

Intercept 1.56 <0.001

SMB 0.22 <0.001

HML 0.35 0.012

 Rm-Rf 0.87 <0.001

LIQ –0.12 0.02

R-squared 0.39

SSE 34.00

AIC –141.34

BIC –127.40

Question #74 - 77 of 144 Question ID: 1501592

The adjusted R2 of Model 2 is closest to:

A) 0.39.
B) 0.37.
C) 0.36.

Question #75 - 77 of 144 Question ID: 1501593

The model better suited for prediction is:

A) Model 1 because it has a lower Bayesian information criterion.

B) Model 2 because it has a higher Akaike information criterion.
C) Model 2 because it has a lower Akaike information criterion.

Question #76 - 77 of 144 Question ID: 1639814

The F-statistic for testing H0: coefficient of LIQ = 0 versus Ha: coefficient of LIQ ≠ 0 is closest to:

A) 13.53.
B) 5.45.
C) 2.11.

Question #77 - 77 of 144 Question ID: 1501595

What is the predicted return for a stock using Model 1 when SMB = 3.30, HML = 1.25 and Rm-Rf
= 5?

A) 6.80%.
B) 7.88%.
C) 9.58%.

Vikas Rathod, an enrolled candidate for the CFA Level II examination, has decided to perform a
calendar test to examine whether there is any abnormal return associated with investments
and disinvestments made in blue-chip stocks on particular days of the week. As a proxy for
blue-chips, he has decided to use the S&P 500 index. The analysis will involve the use of dummy
variables and is based on the past 780 trading days. Here are selected findings of his study:

RSS 0.0039

SSE 0.9534

SST 0.9573

R-squared 0.004

SEE 0.035

Jessica Jones, CFA, a friend of Rathod, overhears that he is interested in regression analysis and
warns him that whenever heteroskedasticity is present in multiple regression this could
undermine the regression results. She mentions that one easy way to spot conditional
heteroskedasticity is through a scatter plot, but she adds that there is a more formal test.
Unfortunately, she can't quite remember its name. Jessica believes that heteroskedasticity can
be rectified using White-corrected standard errors. Her son Jonathan who has also taken part in
the discussion, hears this comment and argues that White correction would typically reduce the
number of Type I errors in financial data.
Question #78 - 80 of 144 Question ID: 1651804

How many dummy variables should Rathod use?

A) Five.
B) Six.
C) Four.

Question #79 - 80 of 144 Question ID: 1651805

What is most likely represented by the intercept of the regression?

A) The return on a particular trading day.

B) The intercept is not a driver of returns, only the independent variables.
C) The drift of a random walk.

Question #80 - 80 of 144 Question ID: 1651806

Are Jessica and her son Jonathan, correct in terms of the method used to correct for
heteroskedasticity and the likely effects?

A) Both are correct.

B) Neither is correct.
C) One is correct.

Question #81 of 144 Question ID: 1471947

An analyst regresses the return of a S&P 500 index fund against the S&P 500, and also
regresses the return of an active manager against the S&P 500. The analyst uses the last five
years of data in both regressions. Without making any other assumptions, which of the
following is most accurate? The index fund:
 regression should have higher sum of squares regression as a ratio to the total sum of
A)
squares.
B) should have a lower coefficient of determination.
C) should have a higher coefficient on the independent variable.

Question #82 of 144 Question ID: 1479949

Suppose the analyst wants to add a dummy variable for whether a person has a business
college degree and an engineering degree. What is the CORRECT representation if a person has
both degrees?

Business Engineering
Degree Dummy Degree Dummy
Variable Variable

A) 0 1

B) 0 0

C) 1 1

Question #83 of 144 Question ID: 1471946

Which of the following statements regarding the R2 is least accurate?

A) The adjusted-R2 not appropriate to use in simple regression.

It is possible for the adjusted-R2 to decline as more variables are added to the multiple
B)
regression.

C) The adjusted-R2 is greater than the R2 in multiple regression.

William Brent, CFA, is the chief financial officer for Mega Flowers, one of the largest producers
of flowers and bedding plants in the Western United States. Mega Flowers grows its plants in
three large nursery facilities located in California. Its products are sold in its company-owned
retail nurseries as well as in large, home and garden "super centers". For its retail stores, Mega
Flowers has designed and implemented marketing plans each season that are aimed at its
consumers in order to generate additional sales for certain high-margin products. To fully
implement the marketing plan, additional contract salespeople are seasonally employed.

For the past several years, these marketing plans seemed to be successful, providing a
significant boost in sales to those specific products highlighted by the marketing efforts.
However, for the past year, revenues have been flat, even though marketing expenditures
increased slightly. Brent is concerned that the expensive seasonal marketing campaigns are
simply no longer generating the desired returns, and should either be significantly modified or
eliminated altogether. He proposes that the company hire additional, permanent salespeople
to focus on selling Mega Flowers' high-margin products all year long. The chief operating officer,
David Johnson, disagrees with Brent. He believes that although last year's results were
disappointing, the marketing campaign has demonstrated impressive results for the past five
years, and should be continued. His belief is that the prior years' performance can be used as a
gauge for future results, and that a simple increase in the sales force will not bring about the
desired results.

Brent gathers information regarding quarterly sales revenue and marketing expenditures for
the past five years. Based upon historical data, Brent derives the following regression equation
for Mega Flowers (stated in millions of dollars):

Expected Sales= 12.6 + 1.6 (Marketing Expenditures)+ 1.2 (# of Salespeople)

Brent shows the equation to Johnson and tells him, "This equation shows that a $1 million
increase in marketing expenditures will increase the independent variable by $1 .6 million, all
other factors being equal." Johnson replies , "It also appears that sales will equal $12.6 million if
all independent variables are equal to zero."

Brent makes the following statements about model evaluation:

Statement 1: The BIC metric usually imposes a higher penalty for overfitting than AIC.
Statement 2: AIC is used if the goal is to have a better forecast, while BIC is used if the
goal is a better goodness of fit.

Question #84 - 87 of 144 Question ID: 1471900

In regard to their conversation about the regression equation:

A) Brent’s statement is correct; Johnson’s statement is correct.

B) Brent’s statement is correct; Johnson’s statement is incorrect.
C) Brent’s statement is incorrect; Johnson’s statement is correct.

Question #85 - 87 of 144 Question ID: 1586001

Regarding Brent's Statements 1 and 2:

A) Only Statement 1 is correct.

B) Only Statement 2 is correct.
C) Both statements are correct.

Question #86 - 87 of 144 Question ID: 1471904

Assuming that next year's marketing expenditures are $3,500,000 and there are five
salespeople, predicted sales for Mega Flowers should will be:

A) $11,600,000.
B) $24,000,000.
C) $24,200,000.

Question #87 - 87 of 144 Question ID: 1471905

Brent would like to further investigate whether at least one of the independent variables can
explain a significant portion of the variation of the dependent variable. Which of the following
methods would be best for Brent to use?

A) The F-statistic.
B) The multiple coefficient of determination.
C) An ANOVA table.

Question #88 of 144 Question ID: 1479921

Alex Wade, CFA, is analyzing the result of a regression analysis comparing the performance of
gold stocks versus a broad equity market index. Wade believes that first lag serial correlation
may be present and, in order to prove his theory, should use which of the following methods to
detect its presence?

A) The Breusch-Pagan test.

B) The Durbin-Watson statistic.
C) The Hansen method.

Werner Baltz, CFA, has regressed 30 years of data to forecast future sales for National Motor
Company based on the percent change in gross domestic product (GDP) and the change in
retail price of a U.S. gallon of fuel. The results are presented below.

Standard Error of
Predictor Coefficient
the Coefficient

Intercept 78 13.710

Δ GDP 30.22 12.120

Δ $ Fuel −412.39 183.981

Analysis of Variance Table (ANOVA)

Source Degrees of Freedom Sum of Squares

Regression 291.30

Error 27 132.12

Total 29 423.42
Question #89 - 91 of 144 Question ID: 1479910

If GDP rises 2.2% and the price of fuels falls $0.15, Baltz's model will predict Company sales to
be (in $ millions) closest to:

A) $82.00.
B) $128.00.
C) $206.00.

Question #90 - 91 of 144 Question ID: 1479911

Baltz proceeds to test the hypothesis that none of the independent variables has significant
explanatory power. He concludes that, at a 5% level of significance:

all of the independent variables have explanatory power, because the calculated F-
A)
statistic exceeds its critical value.
none of the independent variables has explanatory power, because the calculated F-
B)
statistic does not exceed its critical value.
at least one of the independent variables has explanatory power, because the
C)
calculated F-statistic exceeds its critical value.

Question #91 - 91 of 144 Question ID: 1479912

Presence of conditional heteroskedasticity is least likely to affect the:

A) computed F-statistic.
B) coefficient estimates.
C) computed t-statistic.

Question #92 of 144 Question ID: 1471882

When interpreting the results of a multiple regression analysis, which of the following terms
represents the value of the dependent variable when the independent variables are all equal to
zero?

A) Slope coefficient.
B) p-value.
C) Intercept term.

Question #93 of 144 Question ID: 1479908

An analyst is trying to determine whether fund return performance is persistent. The analyst
divides funds into three groups based on whether their return performance was in the top
third (group 1), middle third (group 2), or bottom third (group 3) during the previous year. The
manager then creates the following equation: R = a + b1D1 + b2D2 + b3D3 + ε, where R is return
premium on the fund (the return minus the return on the S&P 500 benchmark) and Di is equal
to 1 if the fund is in group i. Assuming no other information, this equation will suffer from:

A) serial correlation.
B) heteroskedasticity.
C) multicollinearity.

Question #94 of 144 Question ID: 1471867

Consider the following estimated regression equation, with calculated t-statistics of the
estimates as indicated:

AUTOt = 10.0 + 1.25 PIt + 1.0 TEENt – 2.0 INSt

with a PI calculated t-statistic of 0.45, a TEEN calculated t-statistic of 2.2, and an INS
calculated t-statistic of 0.63.

The equation was estimated over 40 companies. Using a 5% level of significance, which of the
independent variables significantly different from zero?
A) TEEN only.
B) PI and INS only.
C) PI only.

Question #95 of 144 Question ID: 1472077

Consider the following model of earnings (EPS) regressed against dummy variables for the
quarters:

EPSt = α + β1Q1t + β2Q2t + β3Q3t

where:

EPSt is a quarterly observation of earnings per share

Q1t takes on a value of 1 if period t is the second quarter, 0 otherwise

Q2t takes on a value of 1 if period t is the third quarter, 0 otherwise

Q3t takes on a value of 1 if period t is the fourth quarter, 0 otherwise

Which of the following statements regarding this model is most accurate? The:

A) significance of the coefficients cannot be interpreted in the case of dummy variables.

B) EPS for the first quarter is represented by the residual.
coefficient on each dummy tells us about the difference in earnings per share between
C)
the respective quarter and the one left out (first quarter in this case).

Damon Washburn, CFA, is currently enrolled as a part-time graduate student at State

University. One of his recent assignments for his course on Quantitative Analysis is to perform a
regression analysis utilizing the concepts covered during the semester. He must interpret the
results of the regression as well as the test statistics. Washburn is confident in his ability to
calculate the statistics because the class is allowed to use statistical software. However, he
realizes that the interpretation of the statistics will be the true test of his knowledge of
regression analysis. His professor has given to the students a list of questions that must be
answered by the results of the analysis.
Washburn has estimated a regression equation in which 160 quarterly returns on the S&P 500
are explained by three macroeconomic variables: employment growth (EMP) as measured by
nonfarm payrolls, gross domestic product (GDP) growth, and private investment (INV). The
results of the regression analysis are as follows:

Coefficient Estimates

Standard Error of
Parameter Coefficient
Coefficient

Intercept 9.50 3.40

EMP -4.50 1.25

GDP 4.20 0.76

INV -0.30 0.16

Other Data:

Regression sum of squares (RSS) = 126.00

Sum of squared errors (SSE) = 267.00
BG-stat: Lag 1: 3.15; Lag 2: 3.22

Degree of Freedom Numerator

Degree of Freedom Denominator

1 2 3

153 3.90 3.06 2.66

154 3.90 3.05 2.66

155 3.90 3.05 2.66

156 3.90 3.05 2.66

157 3.90 3.05 2.66

 158 3.90 3.05 2.66

Question #96 - 99 of 144 Question ID: 1471895

The percentage of the total variation in quarterly stock returns explained by the independent
variables is closest to:

A) 32%.
B) 47%.
C) 42%.

Question #97 - 99 of 144 Question ID: 1586009

Using a 5% level of significance, there is:

A) evidence of first-lag serial correlation in residuals.

B) evidence of second-lag serial correlation in residuals.
C) no evidence of serial correlation in the residuals.

Question #98 - 99 of 144 Question ID: 1471897

What is the predicted quarterly stock return, given the following forecasts?

Employment growth = 2.0%

GDP growth = 1.0%
Private investment growth = -1.0%

A) 4.4%.
B) 4.7%.
C) 5.0%.
Question #99 - 99 of 144 Question ID: 1586010

Assuming a restricted model with all three variables removed and a 5% level of significance, the
most appropriate conclusion is:

With an F-statistic of 2.66, we fail to reject the null hypothesis of all slope coefficients
A)
equal to zero.
With an F-statistic of 24.54, we reject the null hypothesis that all the slope coefficients
B)
are equal to zero.
With an F-statistic of 0.472, we fail to reject the null hypothesis of all coefficients equal
C)
to zero.

Question #100 of 144 Question ID: 1479914

Which of the following questions is least likely answered by using a qualitative dependent
variable?

Based on the following company-specific financial ratios, will company ABC enter
A)
bankruptcy?
Based on the following subsidiary and competition variables, will company XYZ divest
B)
itself of a subsidiary?
Based on the following executive-specific and company-specific variables, how many
C)
shares will be acquired through the exercise of executive stock options?

Raul Gloucester, CFA, is analyzing the returns of a fund that his company offers. He tests the
fund's sensitivity to a small capitalization index and a large capitalization index, as well as to
whether the January effect plays a role in the fund's performance. He uses two years of monthly
returns data, and runs a regression of the fund's return on the indexes and a January-effect
qualitative variable. The "January" variable is 1 for the month of January and zero for all other
months. The results of the regression are shown in the tables below.

Regression Statistics
Multiple R 0.817088

R2 0.667632

Adjusted R2 0.617777

Standard Error 1.655891

Observations 24

ANOVA

df SS MS

Regression 3 110.1568 36.71895

Residual 20 54.8395 2.741975

Total 23 164.9963

Coefficients Standard Error t-Statistic

Intercept -0.23821 0.388717 -0.61282

January 2.560552 1.232634 2.077301

Small Cap Index 0.231349 0.123007 1.880778

Large Cap Index 0.951515 0.254528 3.738359

Exhibit 1: Partial F-Table (5% Level of Significance)

Degree of Freedom Numerator

Degree of Freedom Denominator
1 2 3

18 4.41 3.55 3.16

19 4.38 3.52 3.13

20 4.35 3.49 3.10

21 4.32 3.47 3.07

22 4.30 3.44 3.05

23 4.28 3.42 3.03

Gloucester plans to test for serial correlation and conditional and unconditional
heteroskedasticity.

Question #101 - 106 of 144 Question ID: 1479925

The percent of the variation in the fund's return that is explained by the regression is:

A) 66.76%.
B) 81.71%.
C) 61.78%.

Question #102 - 106 of 144 Question ID: 1479926

Suppose the Breusch-Godfrey statistic is 3.22. At a 5% level of significance, which of the

following is the most accurate conclusion regarding the presence of serial correlation (at two
lags) in the residuals?

No, because the BG statistic is less than the critical test statistic of 3.49, we don't have
A)
evidence of serial correlation.
No, because the BG statistic is less than the critical test statistic of 3.55, we don't have
B)
evidence of serial correlation.
Yes, because the BG statistic exceeds the critical test statistic of 3.16, there is evidence
C)
of serial correlation.

Question #103 - 106 of 144 Question ID: 1616908

Gloucester subsequently revises the model to exclude the small cap index and finds that the
revised model has a RSS of 106.332. Which of the following statements is most accurate? At a
5% level of significance, the test statistic:

of 1.40 indicates that we cannot reject the hypothesis that the coefficient of small-cap
A)
index is not significantly different from 0.
 of 13.39 indicates that we cannot reject the hypothesis that the coefficient of small-cap
B)
index is significantly different from 0.
of 4.35 indicates that we cannot reject the hypothesis that the coefficient of small-cap
C)
index is significantly different from 0.

Question #104 - 106 of 144 Question ID: 1586013

The best test for unconditional heteroskedasticity is:

A) the Breusch-Pagan test only.

B) the Breusch-Godfrey test only.
C) neither the Durbin-Watson test nor the Breusch-Pagan test.

Question #105 - 106 of 144 Question ID: 1479929

In the month of January, if both the small and large capitalization index have a zero return, we
would expect the fund to have a return equal to:

A) 2.799.
B) 2.322.
C) 2.561.

Question #106 - 106 of 144 Question ID: 1479930

Assuming (for this question only) that the F-test was significant but that the t-tests of the
independent variables were insignificant, this would most likely suggest:

A) multicollinearity.
B) serial correlation.
C) conditional heteroskedasticity.
Question #107 of 144 Question ID: 1479878

Consider the following analysis of variance table:

Source Sum of Squares Df Mean Square

Regression 20 1 20

Error 80 20 4

Total 100 21

The F-statistic for a test of joint significance of all the slope coefficients is closest to:

A) 0.2.
B) 0.05.
C) 5.

Dave Turner is a security analyst who is using regression analysis to determine how well two
factors explain returns for common stocks. The independent variables are the natural
logarithm of the number of analysts following the companies, Ln(no. of analysts), and the
natural logarithm of the market value of the companies, Ln(market value). The regression
output generated from a statistical program is given in the following tables. Each p-value
corresponds to a two-tail test.

Turner plans to use the result in the analysis of two investments. WLK Corp. has twelve analysts
following it and a market capitalization of $2.33 billion. NGR Corp. has two analysts following it
and a market capitalization of $47 million.

Table 1: Regression Output

Standard Error of
Variable Coefficient t-statistic p-value
the Coefficient

Intercept 0.043 0.01159 3.71 < 0.001

Ln(No. of Analysts) −0.027 0.00466 −5.80 < 0.001

Ln(Market Value) 0.006 0.00271 2.21 0.028

Table 2: ANOVA

Degrees of Freedom Sum of Squares Mean Square

Regression 2 0.103 0.051

Residual 194 0.559 0.003

Total 196 0.662

Question #108 - 111 of 144 Question ID: 1471887

If the number of analysts on NGR Corp. were to double to 4, the change in the forecast of NGR
would be closest to?

A) −0.035.
B) −0.055.
C) −0.019.

Question #109 - 111 of 144 Question ID: 1585993

Based on a R2 calculated from the information in Table 2, the analyst should conclude that the
number of analysts and ln(market value) of the firm explain:

A) 18.4% of the variation in returns.

B) 84.4% of the variation in returns.
C) 15.6% of the variation in returns.

Question #110 - 111 of 144 Question ID: 1507766

What is the F-statistic for the hypothesis that all slope coefficients are not statistically
significantly different from 0? And, what can be concluded from its value at a 1% level of
significance?
A) F = 17.00, reject a hypothesis that both of the slope coefficients are equal to zero.
B) F = 1.97, fail to reject a hypothesis that both of the slope coefficients are equal to zero.
C) F = 5.80, reject a hypothesis that both of the slope coefficients are equal to zero.

Question #111 - 111 of 144 Question ID: 1585994

Upon further analysis, Turner concludes that multicollinearity is a problem. What might have
prompted this further analysis and what is intuition behind the conclusion?

At least one of the t-statistics was not significant, the F-statistic was significant, and a
A) positive relationship between the number of analysts and the size of the firm would be
expected.
At least one of the t-statistics was not significant, the F-statistic was significant, and an
B)
intercept not significantly different from zero would be expected.
At least one of the t-statistics was not significant, the F-statistic was not significant, and
C) a positive relationship between the number of analysts and the size of the firm would
be expected.

Question #112 of 144 Question ID: 1471871

Henry Hilton, CFA, is undertaking an analysis of the bicycle industry. He hypothesizes that
bicycle sales (SALES) are a function of three factors: the population under 20 (POP), the level of
disposable income (INCOME), and the number of dollars spent on advertising (ADV). All data are
measured in millions of units. Hilton gathers data for the last 20 years. Which of the follow
regression equations correctly represents Hilton's hypothesis?

A) SALES = α x β1 POP x β2 INCOME x β3 ADV x ε.

B) SALES = α + β1 POP + β2 INCOME + β3 ADV + ε.

C) INCOME = α + β1 POP + β2 SALES + β3 ADV + ε.

Question #113 of 144 Question ID: 1479934

A regression with three independent variables have VIF values of 3, 4, and 2 for the first,
second, and third independent variables, respectively. Which of the following conclusions is
most appropriate?

A) Total VIF of 9 indicates a serious multicollinearity problem.

B) Only variable two has a problem with multicollinearity.
C) Multicollinearity does not seem to be a problem with the model.

Lynn Carter, CFA, is an analyst in the research department for Smith Brothers in New York. She
follows several industries, as well as the top companies in each industry. She provides research
materials for both the equity traders for Smith Brothers as well as their retail customers. She
routinely performs regression analysis on those companies that she follows to identify any
emerging trends that could affect investment decisions.

Due to recent layoffs at the company, there has been some consolidation in the research
department. Two research analysts have been laid off, and their workload will now be
distributed among the remaining four analysts. In addition to her current workload, Carter will
now be responsible for providing research on the airline industry. Pinnacle Airlines, a leader in
the industry, represents a large holding in Smith Brothers' portfolio. Looking back over past
research on Pinnacle, Carter recognizes that the company historically has been a strong
performer in what is considered to be a very competitive industry. The stock price over the last
52-week period has outperformed that of other industry leaders, although Pinnacle's net
income has remained flat. Carter wonders if the stock price of Pinnacle has become overvalued
relative to its peer group in the market, and wants to determine if the timing is right for Smith
Brothers to decrease its position in Pinnacle.

Carter decides to run a regression analysis, using the monthly returns of Pinnacle stock as the
dependent variable and monthly returns of the airlines industry as the independent variable.

Analysis of Variance Table (ANOVA)

df SS Mean Square
Source
(Degrees of Freedom) (Sum of Squares) (SS/df)

Regression 1 3,257 (RSS) 3,257 (MSR)

 Error 8 298 (SSE) 37.25 (MSE)

Total 9 3,555 (SS Total)

Question #114 - 117 of 144 Question ID: 1479893

Which of the following is least likely to be an assumption regarding linear regression?

A) The variance of the residuals is constant.

B) The independent variable is correlated with the residuals.
C) A linear relationship exists between the dependent and independent variables.

Question #115 - 117 of 144 Question ID: 1471957

Based upon the information presented in the ANOVA table, what is the coefficient of
determination?

0.839, indicating that company returns explain about 83.9% of the variability of
A)
industry returns.
0.084, indicating that the variability of industry returns explains about 8.4% of the
B)
variability of company returns.
0.916, indicating that the variability of industry returns explains about 91.6% of the
C)
variability of company returns.

Question #116 - 117 of 144 Question ID: 1479894

Based upon her analysis, Carter has derived the following regression equation: Ŷ = 1.75 +
3.25X1. The predicted value of the Y variable equals 50.50, if the:

A) predicted value of the dependent variable equals 15.

B) predicted value of the independent variable equals 15.
C) coefficient of the determination equals 15.
Question #117 - 117 of 144 Question ID: 1479895

Carter realizes that although regression analysis is a useful tool when analyzing investments,
there are certain limitations. Carter made a list of points describing limitations that Smith
Brothers equity traders should be aware of when applying her research to their investment
decisions.

Point 1: Regression residuals may be homoskedastic.

Point 2: Data from regression relationships tends to exhibit parameter instability.
Point 3: Regression residuals may exhibit autocorrelation.
Point 4: The variance of the error term may change with one or more independent
variables.

When reviewing Carter's list, one of the Smith Brothers' equity traders points out that not all of
the points describe regression analysis limitations. Which of Carter's points most accurately
describes the limitations to regression analysis?

A) Points 2, 3, and 4.
B) Points 1, 3, and 4.
C) Points 1, 2, and 3.

Question #118 of 144 Question ID: 1472074

The management of a large restaurant chain believes that revenue growth is dependent upon
the month of the year. Using a standard 12 month calendar, how many dummy variables must
be used in a regression model that will test whether revenue growth differs by month?

A) 11.
B) 13.
C) 12.
Question #119 of 144 Question ID: 1472011

Consider the following graph of residuals and the regression line from a time-series regression:

These residuals exhibit the regression problem of:

A) heteroskedasticity.
B) autocorrelation.
C) homoskedasticity.

Quin Tan Liu, CFA, is looking at the retail property sector for her manager. She is undertaking a
top down review as she feels this is the best way to analyze the industry segment. To predict
U.S. property starts (housing), she has used regression analysis.

Liu included the following variables in her analysis:

Average nominal interest rates during each year (as a decimal)

Annual GDP per capita in $'000

Given these variables the following output was generated from 30 years of data:

Exhibit 1 – Results from Regressing Housing Starts (in Millions) on Interest Rates and GDP
Per Capita

Coefficient Standard Error T-statistic

Intercept 0.42 3.1

Interest rate −1.0 −2.0

GDP per capita 0.03 0.7

 ANOVA df SS MSS F

Regression 2 3.896 1.948 21.644

Residual 27 2.431 0.090

Total 29 6.327

Observations 30

Durbin-Watson 1.22

Exhibit 2 - Critical Values for F-Distribution at 5% Level of Significance

Degrees of Freedom for Degrees of Freedom (df) for the Numerator

the Denominator 1 2 3

26 4.23 3.37 2.98

27 4.21 3.35 2.96

28 4.20 3.34 2.95

29 4.18 3.33 2.93

30 4.17 3.32 2.92

31 4.16 3.31 2.91

32 4.15 3.30 2.90

The following variable estimates have been made for 20X7:

GDP per capita = $46,700

Interest rate = 7%

Question #120 - 122 of 144 Question ID: 1508632

Using the regression model represented in Exhibit 1, what is the predicted number of housing
starts for 20X7?

A) 1,394,420.
B) 1,751,000.
C) 1,394.
Question #121 - 122 of 144 Question ID: 1685254

Which of the following statements best describes the explanatory power of the estimated
regression?

A) The independent variables explain 61.58% of the variation in housing starts.

The residual standard error of only 0.3 indicates that the regression equation is a good
B)
fit for the sample data.
The large F-statistic indicates that both independent variables help explain changes in
C)
housing starts.

Question #122 - 122 of 144 Question ID: 1543892

Which of the following is the least appropriate statement in relation to R-square and adjusted
R-square:

A) Adjusted R-square is a value between 0 and 1 and can be interpreted as a percentage.

Adjusted R-square decreases when the added independent variable adds little value to
B)
the regression model.
R-square typically increases when new independent variables are added to the
C)
regression regardless of their explanatory power.

Jessica Jenkins, CFA, is looking at the retail property sector for her manager. She is undertaking
a top down review as she feels this is the best way to analyze the industry segment. To predict
U.S. property starts (housing), she has used regression analysis.

Jessica included the following variables in her analysis:

Average nominal interest rates during each year (as a decimal)

Annual GDP per capita in $'000

Given these variables, the following output was generated from 30 years of data:
Exhibit 1 – Results from regressing housing starts (in millions) on interest rates and GDP
per capita

Coefficient Standard Error T-statistic

Intercept 0.42 3.1

Interest rate –1.0 –2.0

GDP per capita 0.03 0.7

ANOVA df SS MSS F

Regression 2 3.896 1.948 21.644

Residual 27 2.431 0.090

Total 29 6.327

Observations 30

Durbin-Watson 1.27

Exhibit 2 - Critical Values for F-Distribution at 5% Level of Significance

Degrees of Freedom (df) for the Numerator

Degrees of Freedom for the Denominator

1 2 3

26 4.23 3.37 2.98

27 4.21 3.35 2.96

 28 4.20 3.34 2.95

29 4.18 3.33 2.93

30 4.17 3.32 2.92

31 4.16 3.31 2.91

32 4.15 3.30 2.90

The following variable estimates have been made for 20X7:

GDP per capita = $46,700

Interest rate = 7%

Question #123 - 125 of 144 Question ID: 1479880

Using the regression model represented in Exhibit 1, what is the predicted number of housing
starts for 20X7?

A) 1,394.
B) 1,394,420.
C) 1,751,000.

Question #124 - 125 of 144 Question ID: 1472031

Which of the following statements best describes the explanatory power of the estimated
regression?

The large F-statistic indicates that both independent variables help explain changes in
A)
housing starts.
 The residual standard error of only 0.3 indicates that the regression equation is a good
B)
fit for the sample data.
C) The independent variables explain 61.58% of the variation in housing starts.

Question #125 - 125 of 144 Question ID: 1479882

Which of the following is the least appropriate statement in relation to R-square and adjusted
R-square?

Adjusted R-square decreases when the added independent variable adds little value to
A)
the regression model.
R-square typically increases when new independent variables are added to the
B)
regression.
Adjusted R-square can be higher than the coefficient of determination for a model with
C)
a good fit.

Question #126 of 144 Question ID: 1471873

Henry Hilton, CFA, is undertaking an analysis of the bicycle industry. He hypothesizes that
bicycle sales (SALES) are a function of three factors: the population under 20 (POP), the level of
disposable income (INCOME), and the number of dollars spent on advertising (ADV). All data are
measured in millions of units. Hilton gathers data for the last 20 years and estimates the
following equation (standard errors in parentheses):

SALES = 0.000 + 0.004 POP + 1.031 INCOME + 2.002 ADV

(0.113) (0.005) (0.337) (2.312)

For next year, Hilton estimates the following parameters: (1) the population under 20 will be
120 million, (2) disposable income will be $300,000,000, and (3) advertising expenditures will be
$100,000,000. Based on these estimates and the regression equation, what are predicted sales
for the industry for next year?

A) $557,143,000.
B) $509,980,000.
C) $656,991,000.

Question #127 of 144 Question ID: 1479919

Which of the following is least likely a method of detecting serial correlations?

A) A scatter plot of the residuals over time.

B) The Breusch-Pagan test.
C) The Breusch-Godfrey test.

Question #128 of 144 Question ID: 1479959

A high-yield bond analyst is trying to develop an equation using financial ratios to estimate the
probability of a company defaulting on its bonds. A technique that can be used to develop this
equation is:

A) logistic regression model.

B) dummy variable regression.
C) multiple linear regression adjusting for heteroskedasticity.

Using a recent analysis of salaries (in $1,000) of financial analysts, Timbadia runs a regression of
salaries on education, experience, and gender. (Gender equals one for men and zero for
women.) The regression results from a sample of 230 financial analysts are presented below,
with t-statistics in parenthesis.

Salary = 34.98 + 1.2 Education + 0.5 Experience + 6.3 Gender

(29.11) (8.93) (2.98) (1.58)

Timbadia also runs a multiple regression to gain a better understanding of the relationship
between lumber sales, housing starts, and commercial construction. The regression uses a
large data set of lumber sales as the dependent variable with housing starts and commercial
construction as the independent variables. The results of the regression are:

Coefficient Standard Error t-statistics

Intercept 5.337 1.71 3.14

Housing starts 0.76 0.09 8.44

Commercial construction 1.25 0.33 3.78

Finally, Timbadia runs a regression between the returns on a stock and its industry index with
the following results:

Coefficient Standard Error

Intercept 2.1 2.01

Industry index 1.9 0.31

Standard error of estimate = 15.1

Correlation coefficient = 0.849

Question #129 - 131 of 144 Question ID: 1479889

What is the expected salary (in $1,000) of a woman with 16 years of education and 10 years of
experience?

A) 59.18.
B) 65.48.
C) 54.98.

Question #130 - 131 of 144 Question ID: 1479890

If the return on the industry index is 4%, the stock's expected return would be:

A) 7.6%.
B) 9.7%.
C) 11.2%.

Question #131 - 131 of 144 Question ID: 1479891

The percentage of the variation in the stock return explained by the variation in the industry
index return is closest to:

A) 84.9%.
B) 63.2%.
C) 72.1%.

Question #132 of 144 Question ID: 1471928

Which of the following statements least accurately describes one of the fundamental multiple
regression assumptions?

A) The independent variables are not random.

B) The error term is normally distributed.
C) The variance of the error terms is not constant (i.e., the errors are heteroskedastic).

Question #133 of 144 Question ID: 1472007

An analyst is trying to estimate the beta for a fund. The analyst estimates a regression equation
in which the fund returns are the dependent variable and the Wilshire 5000 is the independent
variable, using monthly data over the past five years. The analyst finds that the correlation
between the square of the residuals of the regression and the Wilshire 5000 is 0.2. Which of the
following is most accurate, assuming a 0.05 level of significance? There is:

no evidence that there is conditional heteroskedasticity or serial correlation in the

A)
regression equation.
 evidence of serial correlation but not conditional heteroskedasticity in the regression
B)
equation.
evidence of conditional heteroskedasticity but not serial correlation in the regression
C)
equation.

Question #134 of 144 Question ID: 1471927

One of the underlying assumptions of a multiple regression is that the variance of the residuals
is constant for various levels of the independent variables. This quality is referred to as:

A) a linear relationship.
B) homoskedasticity.
C) a normal distribution.

Question #135 of 144 Question ID: 1472075

Jill Wentraub is an analyst with the retail industry. She is modeling a company's sales over time
and has noticed a quarterly seasonal pattern. If she includes dummy variables to represent the
seasonality component of the sales she must use:

A) one dummy variables.

B) four dummy variables.
C) three dummy variables.

Question #136 of 144 Question ID: 1471881

Which of the following statements most accurately interprets the following regression results at
the given significance level?

Variable p-value

Intercept 0.0201

X1 0.0284

X2 0.0310

X3 0.0143

The variable X2 is statistically significantly different from zero at the 3% significance

A)
level.
The variables X1 and X2 are statistically significantly different from zero at the 2%
B)
significance level.
The variable X3 is statistically significantly different from zero at the 2% significance
C)
level.

George Smith, an analyst with Great Lakes Investments, has created a comprehensive report on
the pharmaceutical industry at the request of his boss. The Great Lakes portfolio currently has
a significant exposure to the pharmaceuticals industry through its large equity position in the
top two pharmaceutical manufacturers. His boss requested that Smith determine a way to
accurately forecast pharmaceutical sales in order for Great Lakes to identify further investment
opportunities in the industry as well as to minimize their exposure to downturns in the market.
Smith realized that there are many factors that could possibly have an impact on sales, and he
must identify a method that can quantify their effect. Smith used a multiple regression analysis
with five independent variables to predict industry sales. His goal is to not only identify
relationships that are statistically significant, but economically significant as well. The
assumptions of his model are fairly standard: a linear relationship exists between the
dependent and independent variables, the independent variables are not random, and the
expected value of the error term is zero.

Smith is confident with the results presented in his report. He has already done some
hypothesis testing for statistical significance, including calculating a t-statistic and conducting a
two-tailed test where the null hypothesis is that the regression coefficient is equal to zero
versus the alternative that it is not. He feels that he has done a thorough job on the report and
is ready to answer any questions posed by his boss.
However, Smith's boss, John Sutter, is concerned that in his analysis, Smith has ignored several
potential problems with the regression model that may affect his conclusions. He knows that
when any of the basic assumptions of a regression model are violated, any results drawn for
the model are questionable. He asks Smith to go back and carefully examine the effects of
heteroskedasticity, multicollinearity, and serial correlation on his model. In specific, he wants
Smith to make suggestions regarding how to detect these errors and to correct problems that
he encounters.

Question #137 - 140 of 144 Question ID: 1479940

Sutter has detected the presence of conditional heteroskedasticity in Smith's report. This is
evidence that:

A) the error terms are correlated with each other.

the variance of the error term is correlated with the values of the independent
B)
variables.
C) two or more of the independent variables are highly correlated with each other.

Question #138 - 140 of 144 Question ID: 1479941

Suppose there is evidence that the variance of the error term is correlated with the values of
the independent variables. The most likely effect on the statistical inferences Smith can make
from the regressions results using financial data is to commit a:

Type I error by incorrectly failing to reject the null hypothesis that the regression
A)
parameters are equal to zero.
Type II error by incorrectly failing to reject the null hypothesis that the regression
B)
parameters are equal to zero.
Type I error by incorrectly rejecting the null hypotheses that the regression parameters
C)
are equal to zero.
Question #139 - 140 of 144 Question ID: 1479942

Which of the following is most likely to indicate that two or more of the independent variables,
or linear combinations of independent variables, may be highly correlated with each other?
Unless otherwise noted, significant and insignificant mean significantly different from zero and
not significantly different from zero, respectively.

The R2 is low, the F-statistic is insignificant and the Durbin-Watson statistic is

A)
significant.

The R2 is high, the F-statistic is significant and the t-statistics on the individual slope
B)
coefficients are insignificant.

The R2 is high, the F-statistic is significant and the t-statistics on the individual slope
C)
coefficients are significant.

Question #140 - 140 of 144 Question ID: 1479943

Using the Durbin-Watson test statistic, Smith rejects the null hypothesis suggested by the test.
This is evidence that:

A) two or more of the independent variables are highly correlated with each other.
B) the error term is normally distributed.
C) the error terms are correlated with each other.

Question #141 of 144 Question ID: 1472009

Which of the following statements regarding heteroskedasticity is least accurate?

Conditional heteroskedasticity can be detected using the Breusch-Pagan chi-square

A)
statistic.
When not related to independent variables, heteroskedasticity does not pose any
B)
major problems with the regression.
C) Heteroskedasticity only occurs in cross-sectional regressions.
Question #142 of 144 Question ID: 1472066

When two or more of the independent variables in a multiple regression are correlated with
each other, the condition is called:

A) multicollinearity.
B) conditional heteroskedasticity.
C) serial correlation.

Question #143 of 144 Question ID: 1479904

Which of the following is least likely to result in misspecification of a regression model?

A) Omission of an important independent variable.

B) Inappropriate variable form.
C) Transforming a variable.

Question #144 of 144 Question ID: 1471891

Which of the following statements regarding the results of a regression analysis is least
accurate? The:

slope coefficient in a multiple regression is the change in the dependent variable for a
A)
one-unit change in the independent variable, holding all other variables constant.
slope coefficient in a multiple regression is the value of the dependent variable for a
B)
given value of the independent variable.
C) slope coefficients in the multiple regression are referred to as partial betas.