Question #49 - Reading 1 Multiple Regression

Reading: Reading 1 Multiple Regression

PDF File: Reading 1 Multiple Regression.pdf

Page: 22

Status: Unattempted

Shared Context

- 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: A) Type I error by incorrectly failing to reject the null hypothesis that the regression parameters are equal to zero. B) Type II error by incorrectly failing to reject the null hypothesis that the regression parameters are equal to zero. C) Type I error by incorrectly rejecting the null hypotheses that the regression parameters are equal to zero.

Question

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.

Answer Choices:

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

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

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

Explanation

Multicollinearity occurs when two or more of the independent variables, or linear combinations of independent variables, may be highly correlated with each other. In a classic effect of multicollinearity, the R2 is high and the F-statistic is significant, but the t- statistics on the individual slope coefficients are insignificant.

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