Question #75
Reading: Reading 1 Multiple Regression
PDF File: Reading 1 Multiple Regression.pdf
Page: 35
Status: Unattempted
Correct Answer: B
Question
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?
Answer Choices:
A. Incorrectly pooling data
B. Inappropriate variable scaling
C. Inappropriate variable form
Explanation
The relationship between returns and the dependent variables can change over time, so it
is critical that the data be pooled correctly. Running the regression for multiple sub-
periods (in this case two) rather than one time period can produce more accurate results.