Question #124 - Reading 1 Multiple Regression

Reading: Reading 1 Multiple Regression

PDF File: Reading 1 Multiple Regression.pdf

Page: 61

Status: Unattempted

Shared Context

- 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

Should Salve be concerned about residual multicollinearity?

Answer Choices:

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

Explanation

Multicollinearity is detected using the variance inflation factor (VIF). VIF values greater than 5 (i.e., R2 > 80%) warrant further investigation, while values above 10 (i.e., R2 > 90%) indicate severe multicollinearity. None of the variables have VIF > 5.

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