Question #74 - Reading 1 Multiple Regression

Reading: Reading 1 Multiple Regression

PDF File: Reading 1 Multiple Regression.pdf

Page: 35

Status: Unattempted

Shared Context

- Based upon the information presented in the ANOVA table, what is the coefficient of determination? A) 0.084, indicating that the variability of industry returns explains about 8.4% of the variability of company returns. B) 0.916, indicating that the variability of industry returns explains about 91.6% of the variability of company returns. C) 0.839, indicating that company returns explain about 83.9% of the variability of industry returns.

Question

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?

Answer Choices:

A. Points 1, 2, and 3

B. Points 2, 3, and 4

C. Points 1, 3, and 4

Explanation

One of the basic assumptions of regression analysis is that the variance of the error terms is constant, or homoskedastic. Any violation of this assumption is called heteroskedasticity. Therefore, Point 1 is incorrect, but Point 4 is correct because it describes conditional heteroskedasticity, which results in unreliable estimates of standard errors. Points 2 and 3 also describe limitations of regression analysis.

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