Question #50

Reading: Reading 1 Multiple Regression

PDF File: Reading 1 Multiple Regression.pdf

Page: 22

Status: Unattempted

Correct Answer: A

Part of Context Group: Q49-50
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
Using the Durbin-Watson test statistic, Smith rejects the null hypothesis suggested by the test. This is evidence that:
Answer Choices:
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
Explanation
Serial correlation (also called autocorrelation) exists when the error terms are correlated with each other. Multicollinearity, on the other hand, occurs when two or more of the independent variables are highly correlated with each other. One assumption of multiple regression is that the error term is normally distributed.
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