Question #1 of 195 Question ID: 1208325

63 monthly stock returns for a fund between 1997 and 2002 are regressed against the market return,

measured by the Wilshire 5000, and two dummy variables. The fund changed managers on January 2,

2000. Dummy variable one is equal to 1 if the return is from a month between 2000 and 2002. Dummy
variable number two is equal to 1 if the return is from the second half of the year. There are 36

observations when dummy variable one equals 0, half of which are when dummy variable two also equals

0. The following are the estimated coe cient values and standard errors of the coe cients.

Coe cient Value Standard error

Market 1.43000 0.319000

Dummy 1 0.00162 0.000675

Dummy 2 0.00132 0.000733

What is the p-value for a test of the hypothesis that performance in the second half of the year is di erent

than performance in the rst half of the year?

A) Between 0.05 and 0.10.

B) Lower than 0.01.

C) Between 0.01 and 0.05.

Question #2 of 195 Question ID: 1208277

When interpreting the results of a multiple regression analysis, which of the following terms represents
the value of the dependent variable when the independent variables are all equal to zero?

A) Slope coe cient.

B) Intercept term.

C) p-value.

Question #3 of 195 Question ID: 1208380

An analyst is estimating a regression equation with three independent variables, and calculates the R2, the

adjusted R2, and the F-statistic. The analyst then decides to add a fourth variable to the equation. Which of
the following is most accurate?

A) The adjusted R2 will be higher, but the R2 and F-statistic could be higher or lower.

B) The R2 and F-statistic will be higher, but the adjusted R2 could be higher or lower.
C) The R2 will be higher, but the adjusted R2 and F-statistic could be higher or lower.

Question #4 of 195 Question ID: 1208399

One of the underlying assumptions of a multiple regression is that the variance of the residuals is constant

for various levels of the independent variables. This quality is referred to as:

A) a normal distribution.

B) homoskedasticity.

C) a linear relationship.

Question #5 of 195 Question ID: 1208364

The F-statistic is the ratio of the mean square regression to the mean square error. The mean squares are
provided directly in the analysis of variance (ANOVA) table. Which of the following statements regarding
the ANOVA table for a regression is most accurate?

A) R2 = SS
Error / SSTotal.

B) R2 = SSRegression / SSTotal.

C) R2 = SSRegression - SSError / SSTotal.

Question #6 of 195 Question ID: 1208443

An analyst is trying to estimate the beta for a fund. The analyst estimates a regression equation in which
the fund returns are the dependent variable and the Wilshire 5000 is the independent variable, using
monthly data over the past ve years. The analyst nds that the correlation between the square of the

residuals of the regression and the Wilshire 5000 is 0.2. Which of the following is most accurate, assuming
a 0.05 level of signi cance? There is:

A) no evidence that there is conditional heteroskedasticity or serial correlation in the regression

equation.

B) evidence of serial correlation but not conditional heteroskedasticity in the regression equation.

C) evidence of conditional heteroskedasticity but not serial correlation in the regression equation.
Question #7 of 195 Question ID: 1208479

A high-yield bond analyst is trying to develop an equation using nancial ratios to estimate the probability
of a company defaulting on its bonds. Since the analyst is using data over di erent economic time periods,

there is concern about whether the variance is constant over time. A technique that can be used to
develop this equation is:

A) multiple linear regression adjusting for heteroskedasticity.

B) logit modeling.

C) dummy variable regression.

Consider a study of 100 university endowment funds that was conducted to determine if the funds' annual
risk-adjusted returns could be explained by the size of the fund and the percentage of fund assets that are
managed to an indexing strategy. The equation used to model this relationship is:

ARARi = b0 + b1Sizei + b2Indexi + ei

Where:

ARARi = the average annual risk-adjusted percent returns for the fund i over the 1998-2002 time

period.

Sizei = the natural logarithm of the average assets under management for fund i.

Indexi = the percentage of assets in fund i that were managed to an indexing strategy.

The table below contains a portion of the regression results from the study.

Partial Results from Regression ARAR on Size and Extent of Indexing

Coe cients Standard Error t-Statistic

Intercept ??? 0.55 −5.2

Size 0.6 0.18 ???

Index 1.1 ??? 2.1

Question #8 - 13 of 195 Question ID: 1208270

Which of the following is the most accurate interpretation of the slope coe cient for size? ARAR:

A) and index will change by 1.1% when the natural logarithm of assets under management changes
by 1.0.

B) will change by 0.6% when the natural logarithm of assets under management changes by 1.0,
holding index constant.

C) will change by 1.0% when the natural logarithm of assets under management changes by 0.6,
holding index constant.
Question #9 - 13 of 195 Question ID: 1208271

Which of the following is the estimated standard error of the regression coe cient for index?

A) 0.52.

B) 2.31.

C) 1.91.

Question #10 - 13 of 195 Question ID: 1208272

Which of the following is the t-statistic for size?

A) 3.33.

B) 0.70.

C) 0.30.

Question #11 - 13 of 195 Question ID: 1208273

Which of the following is the estimated intercept for the regression?

A) −2.86.

B) −0.11.

C) −9.45.

Question #12 - 13 of 195 Question ID: 1208274

Which of the following statements is most accurate regarding the signi cance of the regression
parameters at a 5% level of signi cance?

A) The parameter estimates for the intercept and the independent variable size are signi cantly
di erent than zero. The coe cient for index is not signi cant.

B) The parameter estimates for the intercept are signi cantly di erent than zero. The slope
coe cients for index and size are not signi cant.

C) All of the parameter estimates are signi cantly di erent than zero at the 5% level of signi cance.
Question #13 - 13 of 195 Question ID: 1208275

Which of the following is NOT a required assumption for multiple linear regression?

A) The expected value of the error term is zero.

B) The error term is normally distributed.

C) The error term is linearly related to the dependent variable.

Question #14 of 195 Question ID: 1208449

An analyst is estimating whether a fund's excess return for a month is dependent on interest rates and
whether the S&P 500 has increased or decreased during the month. The analyst collects 90 monthly return
premia (the return on the fund minus the return on the S&P 500 benchmark), 90 monthly interest rates,
and 90 monthly S&P 500 index returns from July 1999 to December 2006. After estimating the regression

equation, the analyst nds that the correlation between the regressions residuals from one period and the
residuals from the previous period is 0.199. Which of the following is most accurate at a 0.05 level of
signi cance, based solely on the information provided? The analyst:

A) can conclude that the regression exhibits serial correlation, but cannot conclude that the
regression exhibits multicollinearity.

B) can conclude that the regression exhibits multicollinearity, but cannot conclude that the
regression exhibits serial correlation.

C) cannot conclude that the regression exhibits either serial correlation or multicollinearity.

Question #15 of 195 Question ID: 1208480

Which of the following is NOT a model that has a qualitative dependent variable?

A) Discriminant analysis.

B) Event study.

C) Logit.

Question #16 of 195 Question ID: 1208326

A dependent variable is regressed against three independent variables across 25 observations. The

regression sum of squares is 119.25, and the total sum of squares is 294.45. The following are the
estimated coe cient values and standard errors of the coe cients.

Coe cient Value Standard error

1 2.43 1.4200

2 3.21 1.5500

3 0.18 0.0818

For which of the coe cients can the hypothesis that they are equal to zero be rejected at the 0.05 level of
signi cance?

A) 1 and 2 only.

B) 3 only.

C) 2 and 3 only.

Question #17 of 195 Question ID: 1208465

An analyst runs a regression of portfolio returns on three independent variables. These independent
variables are price-to-sales (P/S), price-to-cash ow (P/CF), and price-to-book (P/B). The analyst discovers
that the p-values for each independent variable are relatively high. However, the F-test has a very small p-
value. The analyst is puzzled and tries to gure out how the F-test can be statistically signi cant when the
individual independent variables are not signi cant. What violation of regression analysis has occurred? 

A) serial correlation.

B) multicollinearity.

C) conditional heteroskedasticity.

Question #18 of 195 Question ID: 1208447

Alex Wade, CFA, is analyzing the result of a regression analysis comparing the performance of gold stocks
versus a broad equity market index. Wade believes that serial correlation may be present, and in order to
prove his theory, should use which of the following methods to detect its presence?

A) The Hansen method.

B) The Durbin-Watson statistic.

C) The Breusch-Pagan test.

Question #19 of 195 Question ID: 1208328

Seventy-two monthly stock returns for a fund between 1997 and 2002 are regressed against the market
return, measured by the Wilshire 5000, and two dummy variables. The fund changed managers on January
2, 2000. Dummy variable one is equal to 1 if the return is from a month between 2000 and 2002. Dummy
variable number two is equal to 1 if the return is from the second half of the year. There are 36

observations when dummy variable one equals 0, half of which are when dummy variable two also equals
zero. The following are the estimated coe cient values and standard errors of the coe cients.

Coe cient Value Standard error

Market 1.43000 0.319000

Dummy 1 0.00162 0.000675

Dummy 2 −0.00132 0.000733

What is the p-value for a test of the hypothesis that the beta of the fund is greater than 1?

A) Between 0.05 and 0.10.

B) Between 0.01 and 0.05.

C) Lower than 0.01.

Question #20 of 195 Question ID: 1208265

Consider the following regression equation:

Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi – 2.0 COMPi + 8.0 CAPi

where Sales is dollar sales in millions, R&D is research and development expenditures in
millions, ADV is dollar amount spent on advertising in millions, COMP is the number of

competitors in the industry, and CAP is the capital expenditures for the period in millions of
dollars.

Which of the following is NOT a correct interpretation of this regression information

A) One more competitor will mean $2 million less in Sales (holding everything else constant).

B) If a company spends $1 million more on capital expenditures (holding everything else constant),
Sales are expected to increase by $8.0 million.

C) If R&D and advertising expenditures are $1 million each, there are 5 competitors, and capital
expenditures are $2 million, expected Sales are $8.25 million.

Question #21 of 195 Question ID: 1208401

Assume that in a particular multiple regression model, it is determined that the error terms are
uncorrelated with each other. Which of the following statements is most accurate?

A) This model is in accordance with the basic assumptions of multiple regression analysis because
the errors are not serially correlated.

B) Serial correlation may be present in this multiple regression model, and can be con rmed only
through a Durbin-Watson test.

C) Unconditional heteroskedasticity present in this model should not pose a problem, but can be
corrected by using robust standard errors.

Question #22 of 195 Question ID: 1208361

May Jones estimated a regression that produced the following analysis of variance (ANOVA) table:

Source Sum of squares Degrees of freedom Mean square

Regression 20 1 20

Error 80 40 2

Total 100 41

The values of R2 and the F-statistic for the t of the model are:

A) R2 = 0.20 and F = 10.

B) R2 = 0.25 and F = 10.

C) R2 = 0.25 and F = 0.909.

Question #23 of 195 Question ID: 1208333

Wanda Brunner, CFA, is trying to calculate a 95% con dence interval (df = 40) for a regression equation
based on the following information:

Coe cient Standard Error

Intercept -10.60% 1.357

DR 0.52 0.023

CS 0.32 0.025

What are the lower and upper bounds for variable DR?

A) 0.488 to 0.552.

B) 0.481 to 0.559.

C) 0.474 to 0.566.
Question #24 of 195 Question ID: 1208264

Consider the following regression equation:

Salesi = 20.5 + 1.5 R&Di + 2.5 ADVi – 3.0 COMPi

where Sales is dollar sales in millions, R&D is research and development expenditures in
millions, ADV is dollar amount spent on advertising in millions, and COMP is the number of
competitors in the industry.

Which of the following is NOT a correct interpretation of this regression information?

A) If a company spends $1 more on R&D (holding everything else constant), sales are expected to
increase by $1.5 million.

B) One more competitor will mean $3 million less in sales (holding everything else constant).

C) If R&D and advertising expenditures are $1 million each and there are 5 competitors, expected
sales are $9.5 million.

Question #25 of 195 Question ID: 1208334

Wanda Brunner, CFA, is trying to calculate a 98% con dence interval (df = 40) for a regression equation

based on the following information:

Coe cient Standard Error

Intercept -10.60% 1.357

DR 0.52 0.023

CS 0.32 0.025

Which of the following are closest to the lower and upper bounds for variable CS?

A) 0.260 to 0.381.

B) 0.267 to 0.374.

C) 0.274 to 0.367.

Question #26 of 195 Question ID: 1208444

An analyst is estimating whether a fund's excess return for a quarter is related to interest rates and last

quarter's excess return. The model residuals exhibit unconditional heteroskedasticity. The model residuals
exhibit unconditional heteroskedasticity and serial correlation due to inclusion of lagged dependent
variable. Which of the following is most accurate? Parameter estimates for the regression model of excess
returns on interest rates and prior quarter's excess returns will be:

A) inaccurate but statistical inference about the parameters will be valid.

B) inaccurate and statistical inference about the parameters will not be valid.

C) accurate but statistical inference about the parameters will not be valid.

Question #27 of 195 Question ID: 1208445

Which of the following is least likely a method of detecting serial correlations?

A) A scatter plot of the residuals over time.

B) The Breusch-Pagan test.

C) The Durbin-Watson test.

Kathy Williams, CFA, and Nigel Faber, CFA, have been managing a hedge fund over the past 18 months.
The fund's objective is to eliminate all systematic risk while earning a portfolio return greater than the
return on Treasury Bills. Williams and Faber want to test whether they have achieved this objective. Using
monthly data, they nd that the average monthly return for the fund was 0.417%, and the average return
on Treasury Bills was 0.384%. They perform the following regression (Equation I):

(fund return)t = b0 + b1 (T-bill return) t + b2 (S&P 500 return) t + b3 (global index return) t + et

The correlation matrix for the independent variables appears below:

S&P 500 Global Index

T-bill 0.163 0.141

S&P 500 0.484

In performing the regression, they obtain the following results for Equation I:

Variable Coe cient Standard Error

Intercept 0.232 0.098

T-bill return 0.508 0.256

S&P 500 Return −0.0161 0.032

Global index return 0.0037 0.034

R2 = 22.44%

adj. R2 = 5.81%
 standard error of forecast = 0.0734 (percent)

Williams argues that the equation may su er from multicollinearity and reruns the regression omitting the
return on the global index. This time, the regression (Equation II) is:

(fund return) t = b0 + b1 (T-bill return) t + b2 (S&P 500 return) t +et

The results for Equation II are:

Variable Coe cient Standard Error

Intercept 0.232 0.095

T-bill return 0.510 0.246

S&P 500 return −0.015 0.028

R2 = 22.37%

adj. R2 = 12.02%

standard error of forecast = 0.0710 (percent)

Based on the results of equation II, Faber concludes that a 1% increase in t-bill return leads to more than
one half of 1% increase in the fund return.

Finally, Williams reruns the regression omitting the return on the S&P 500 as well. This time, the regression

(Equation III) is:

(fund return) t = b0 + b1 (T-bill return) t +et

The results for Equation III are:

Variable Coe cient Standard Error

Intercept 0.229 0.093

T-bill return 0.4887 0.2374

R2 = 20.94%

adj. R2 = 16.00%

standard error of forecast = 0.0693 (percent)

Question #28 - 33 of 195 Question ID: 1208467

In the regression using Equation I, which of the following hypotheses can be rejected at a 5% level of

signi cance in a two-tailed test? (The corresponding independent variable is indicated after each null
hypothesis.)

A) H0: b2 = 0 (S&P 500)

B) H0: b0 = 0 (intercept)

C) H0: b1 = 0 (T-bill)
Question #29 - 33 of 195 Question ID: 1208468

In the regression using Equation II, which of the following hypothesis or hypotheses can be rejected at a

5% level of signi cance in a two-tailed test? (The corresponding independent variable is indicated after
each null hypothesis.)

A) H0: b0 = 0 (intercept) only.

B) H0: b0 = 0 (intercept) and b1 = 0 (T-bill) only.

C) H0: b1 = 0 (T-bill) and H0: b2 = 0 (S&P 500) only.

Question #30 - 33 of 195 Question ID: 1208469

With respect to multicollinearity and Williams' removal of the global index variable when running

regression Equation II, Williams had:

A) reason to be suspicious and took the correct step to cure the problem.

B) reason to be suspicious, but she took the wrong step to cure the problem.

C) no reason to be suspicious, but took a correct step to improve the analysis.

Question #31 - 33 of 195 Question ID: 1208470

Regarding Faber's conjecture about impact of t-bill return in equation II, the most appropriate null
hypothesis and most appropriate conclusion (at a 5% level of signi cance) is:

Null
Conclusion
Hypothesis

A) Fail to reject
H0: b1 ≤ 0.5
H0

B) Fail to reject
H0: b1 ≥ 0.5
H0>

C) H : b ≤ 0.5 Reject H0
0 1

Question #32 - 33 of 195 Question ID: 1208471

Which of the following problems, multicollinearity and/or serial correlation, can bias the estimates of the

slope coe cients?

A) Neither multicollinearity, nor serial correlation.

B) Both multicollinearity and serial correlation.

C) Multicollinearity, but not serial correlation.

Question #33 - 33 of 195 Question ID: 1208472

If we expect that next month the T-bill rate will equal its average over the last 18 months, using Equation

III, calculate the 95% con dence interval for the expected fund return.

A) 0.270 to 0.564.

B) 0.259 to 0.598.

C) 0.296 to 0.538.

John Rains, CFA, is a professor of nance at a large university located in the Eastern United States. He is
actively involved with his local chapter of the Society of Financial Analysts. Recently, he was asked to teach

one session of a Society-sponsored CFA review course, speci cally teaching the class addressing the topic
of quantitative analysis. Based upon his familiarity with the CFA exam, he decides that the rst part of the

session should be a review of the basic elements of quantitative analysis, such as hypothesis testing,
regression and multiple regression analysis. He would like to devote the second half of the review session

to the practical application of the topics he covered in the rst half.

Rains decides to construct a sample regression analysis case study for his students in order to

demonstrate a "real-life" application of the concepts. He begins by compiling nancial information on a

ctitious company called Big Rig, Inc. According to the case study, Big Rig is the primary producer of the

equipment used in the exploration for and drilling of new oil and gas wells in the United States. Rains has
based the information in the problem on an actual equity holding in his personal portfolio, but has

simpli ed the data for the purposes of the review course.

Rains constructs a basic regression model for Big Rig in order to estimate its pro tability (in millions), using

two independent variables: the number of new wells drilled in the U.S. (WLS) and the number of new
competitors (COMP) entering the market:

Pro ts = b0 + b1WLS – b2COMP + ε

Based on the model, the estimated regression equation is:

Pro ts = 22.5 + 0.98(WLS) − 0.35(COMP)

Using the past 5 years of quarterly data, he calculated the following regression estimates for Big Rig, Inc:

Coe cient Standard Error

Intercept 22.5 2.465

 WLS 0.98 0.683

COMP 0.35 0.186

Question #34 - 39 of 195 Question ID: 1208430

Using the information presented, the t-statistic for the number of new competitors (COMP) coe cient is:

A) 1.435.

B) 1.882.

C) 9.128.

Question #35 - 39 of 195 Question ID: 1208431

Rains asks his students to test the null hypothesis that states for every new well drilled, pro ts will be

increased by the given multiple of the coe cient, all other factors remaining constant. The appropriate
hypotheses for this two-tailed test can best be stated as:

A) H0: b1 ≤ 0.98 versus Ha: b1 > 0.98.

B) H0: b1 = 0.98 versus Ha: b1 ≠ 0.98.

C) H0: b1 = 0.35 versus Ha: b1 ≠ 0.35.

Question #36 - 39 of 195 Question ID: 1208432

Continuing with the analysis of Big Rig, Rains asks his students to calculate the mean squared error(MSE).

Assume that the sum of squared errors (SSE) for the regression model is 359.

A) 18.896.

B) 21.118.

C) 17.956.

Question #37 - 39 of 195 Question ID: 1208433

Rains now wants to test the students' knowledge of the use of the F-test and the interpretation of the F-

statistic. Which of the following statements regarding the F-test and the F-statistic is the most correct?

A) The F-statistic is almost always formulated to test each independent variable separately, in order
to identify which variable is the most statistically signi cant.
B) The F-statistic is used to test whether at least one independent variable in a set of independent
variables explains a signi cant portion of the variation of the dependent variable.

C) The F-test is usually formulated as a two-tailed test.

Question #38 - 39 of 195 Question ID: 1208434

One of the main assumptions of a multiple regression model is that the variance of the residuals is

constant across all observations in the sample. A violation of the assumption is most likely to be described
as:

A) heteroskedasticity.

B) unstable remnant deviation.

C) positive serial correlation.

Question #39 - 39 of 195 Question ID: 1208435

Rains reminds his students that a common condition that can distort the results of a regression analysis is

referred to as serial correlation. The presence of serial correlation can be detected through the use of:

A) the Durbin-Watson statistic.

B) the Hansen method.

C) the Breusch-Pagen test.

Question #40 of 195 Question ID: 1208476

What is the main di erence between probit models and typical dummy variable models?

A) A dummy variable represents a qualitative independent variable, while a probit model is used for
estimating the probability of a qualitative dependent variable.

B) Dummy variable regressions attempt to create an equation to classify items into one of two
categories, while probit models estimate a probability.

C) There is no di erence--a probit model is simply a special case of a dummy variable regression.

Question #41 of 195 Question ID: 1208383

An analyst regresses the return of a S&P 500 index fund against the S&P 500, and also regresses the

return of an active manager against the S&P 500. The analyst uses the last ve years of data in both
regressions. Without making any other assumptions, which of the following is most accurate? The index

fund:

A) should have a higher coe cient on the independent variable.

B) should have a lower coe cient of determination.

C) regression should have higher sum of squares regression as a ratio to the total sum of squares.

Question #42 of 195 Question ID: 1208381

Which of the following statements regarding the R2 is least accurate?

A) The R2 of a regression will be greater than or equal to the adjusted-R2 for the same regression.

B) The F-statistic for the test of the t of the model is the ratio of the mean squared regression to the
mean squared error.

C) The R2 is the ratio of the unexplained variation to the explained variation of the dependent

variable.

Question #43 of 195 Question ID: 1208266

Henry Hilton, CFA, is undertaking an analysis of the bicycle industry. He hypothesizes that bicycle sales

(SALES) are a function of three factors: the population under 20 (POP), the level of disposable income
(INCOME), and the number of dollars spent on advertising (ADV). All data are measured in millions of units.

Hilton gathers data for the last 20 years. Which of the follow regression equations correctly represents
Hilton's hypothesis?

A) INCOME = α + β1 POP + β2 SALES + β3 ADV + ε.

B) SALES = α + β1 POP + β2 INCOME + β3 ADV + ε.

C) SALES = α x β1 POP x β2 INCOME x β3 ADV x ε.

Question #44 of 195 Question ID: 1208268

Henry Hilton, CFA, is undertaking an analysis of the bicycle industry. He hypothesizes that bicycle sales

(SALES) are a function of three factors: the population under 20 (POP), the level of disposable income
(INCOME), and the number of dollars spent on advertising (ADV). All data are measured in millions of units.

Hilton gathers data for the last 20 years and estimates the following equation (standard errors in
parentheses):

SALES = 0.000 + 0.004 POP + 1.031 INCOME + 2.002 ADV

(0.113) (0.005) (0.337) (2.312)

For next year, Hilton estimates the following parameters: (1) the population under 20 will be 120 million,
(2) disposable income will be $300,000,000, and (3) advertising expenditures will be $100,000,000. Based

on these estimates and the regression equation, what are predicted sales for the industry for next year?

A) $509,980,000.

B) $656,991,000.

C) $557,143,000.

Question #45 of 195 Question ID: 1208286

Which of the following statements regarding the results of a regression analysis is least accurate? The:

A) slope coe cient in a multiple regression is the value of the dependent variable for a given value of
the independent variable.

B) slope coe cients in the multiple regression are referred to as partial betas.

C) slope coe cient in a multiple regression is the change in the dependent variable for a one-unit
change in the independent variable, holding all other variables constant.

Question #46 of 195 Question ID: 1208386

Jill Wentraub is an analyst with the retail industry. She is modeling a company's sales over time and has

noticed a quarterly seasonal pattern. If she includes dummy variables to represent the seasonality
component of the sales she must use:

A) four dummy variables.

B) three dummy variables.

C) one dummy variables.

Question #47 of 195 Question ID: 1208481

Mary Steen estimated that if she purchased shares of companies who announced restructuring plans at
the announcement and held them for ve days, she would earn returns in excess of those expected from

the market model of 0.9%. These returns are statistically signi cantly di erent from zero. The model was

estimated without transactions costs, and in reality these would approximate 1% if the strategy were
e ected. This is an example of:

A) a market ine ciency.

B) statistical signi cance, but not economic signi cance.

C) statistical and economic signi cance.

Som Muttney has been asked to forecast the level of operating pro t for a proposed new branch of a tire
store. His forecast is one component in forecasting operating pro t for the entire company for the next

scal year. Muttney decide to conduct multiple regression analysis using "branch store operating pro t" as
the dependent variable and three independent variables. The three independent variables are "population

within 5 miles of the branch," "operating hours per week," and "square footage of the facility." Muttney
used data on the company's existing 23 branches to develop the model (n=23).

Regression of Operating Pro t on Population, Operating Hours, and Square

Footage

Dependent Variable Operating Pro t (Y)

Independent Variables Coe cient Estimate t-value

Intercept 103,886 2.740

Population within 5 miles (X1) 4.372 2.133

Operating hours per week (X2) 214.856 0.258

Square footage of facility (X3) 6.767 2.643

Regression sum of squares 6,349

Sum of squares total 10,898

Two-tailed Signi cance

Degrees of Freedom .20 .10 .05 .02 .01

3 1.638 2.353 3.182 4.541 5.841

19 1.328 1.729 2.093 2.539 2.861

23 1.319 1.714 2.069 2.50 2.807

In his research report, Muttney claims that when the square footage of the store is increased by 1%,
operating pro t will increase by more than 5%

Question #48 - 53 of 195 Question ID: 1208316

The 95% con dence interval for slope coe cient for independent variable "population" is closest to:
A) −0.81 − 9.56

B) −0.086 − 8.83

C) 0.081 − 8.66

Question #49 - 53 of 195 Question ID: 1208317

The probability of nding a value of t for variable X1 that is as-large or larger than |2.133| when the null

hypothesis is true is:

A) between 1% and 2%.

B) between 5% and 10%.

C) between 2% and 5%.

Question #50 - 53 of 195 Question ID: 1208318

The correlation between the actual values of operating pro t and the predicted value of operating pro t is
closest to:

A) 0.36

B) 0.76

C) 0.53

Question #51 - 53 of 195 Question ID: 1208319

Regarding Muttney's claim about a 5% increase in operating pro t for a 1% increase in square footage, the
most appropriate null hypothesis and conclusion (at a 5% level of signi cance) are:

Null
Conclusion
Hypothesis

A) Fail to reject
H0: b3 ≤ 5
H0

B) H : b ≤ 5 Reject H0
0 3

C) Fail to reject
H0: b3 ≥ 5
H0
Question #52 - 53 of 195 Question ID: 1208320

The standard deviation of regression residuals is closest to:

A) 15.47

B) 0.42

C) 239.42

Question #53 - 53 of 195 Question ID: 1208321

The operating pro t model as speci ed is most likely a:

A) Cross-sectional regression

B) Autoregressive model

C) Time series regression

Question #54 of 195 Question ID: 1208478

Which of the following questions is least likely answered by using a qualitative dependent variable?

A) Based on the following executive-speci c and company-speci c variables, how many shares will
be acquired through the exercise of executive stock options?

B) Based on the following subsidiary and competition variables, will company XYZ divest itself of a
subsidiary?

C) Based on the following company-speci c nancial ratios, will company ABC enter bankruptcy?

Question #55 of 195 Question ID: 1208388

Consider the following model of earnings (EPS) regressed against dummy variables for the quarters:

EPSt = α + β1Q1t + β2Q2t + β3Q3t

where:

EPSt is a quarterly observation of earnings per share

Q1t takes on a value of 1 if period t is the second quarter, 0 otherwise

Q2t takes on a value of 1 if period t is the third quarter, 0 otherwise

Q3t takes on a value of 1 if period t is the fourth quarter, 0 otherwise

Which of the following statements regarding this model is most accurate? The:

A) coe cient on each dummy tells us about the di erence in earnings per share between the
respective quarter and the one left out ( rst quarter in this case).

B) EPS for the rst quarter is represented by the residual.

C) signi cance of the coe cients cannot be interpreted in the case of dummy variables.

Question #56 of 195 Question ID: 1208324

Consider the following estimated regression equation, with standard errors of the coe cients as

indicated:

Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi – 2.0 COMPi + 8.0 CAPi

where the standard error for R&D is 0.45, the standard error for ADV is 2.2, the standard error

for COMP 0.63, and the standard error for CAP is 2.5.

The equation was estimated over 40 companies. Using a 5% level of signi cance, what are the hypotheses

and the calculated test statistic to test whether the slope on R&D is di erent from 1.0?

A) H0: bR&D = 1 versus Ha: bR&D≠ 1; t = 0.556.

B) H0: bR&D ≠ 1 versus Ha: bR&D = 1; t = 2.778.

C) H0: bR&D = 1 versus Ha: bR&D≠1; t = 2.778.

Question #57 of 195 Question ID: 1208474

When constructing a regression model to predict portfolio returns, an analyst runs a regression for the

past ve year period. After examining the results, she determines that an increase in interest rates two
years ago had a signi cant 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 misspeci cation?

A) Forecasting the past.

B) Incorrectly pooling data.

C) Using a lagged dependent variable as an independent variable.

Question #58 of 195 Question ID: 1208359

A dependent variable is regressed against three independent variables across 25 observations. The

regression sum of squares is 119.25, and the total sum of squares is 294.45. The following are the
estimated coe cient values and standard errors of the coe cients.

Coe cient Value Standard error

1 2.43 1.4200

2 3.21 1.5500

3 0.18 0.0818

What is the p-value for the test of the hypothesis that all three of the coe cients are equal to zero?

A) Between 0.025 and 0.05.

B) lower than 0.025.

C) Between 0.05 and 0.10.

Toni Williams, CFA, has determined that commercial electric generator sales in the Midwest U.S. for Self-

Start Company is a function of several factors in each area: the cost of heating oil, the temperature,

snowfall, and housing starts. Using data for the most currently available year, she runs a cross-sectional

regression where she regresses the deviation of sales from the historical average in each area on the
deviation of each explanatory variable from the historical average of that variable for that location. She

feels this is the most appropriate method since each geographic area will have di erent average values for

the inputs, and the model can explain how current conditions explain how generator sales are higher or

lower from the historical average in each area. In summary, she regresses current sales for each area
minus its respective historical average on the following variables for each area.

The di erence between the retail price of heating oil and its historical average.
The mean number of degrees the temperature is below normal in Chicago.

The amount of snowfall above the average.

The percentage of housing starts above the average.

Williams used a sample of 26 observations obtained from 26 metropolitan areas in the Midwest U.S. The

results are in the tables below. The dependent variable is in sales of generators in millions of dollars.

Coe cient Estimates Table

Standard Error of the

Variable Estimated Coe cient
Coe cient

Intercept 5.00 1.850

$ Heating Oil 2.00 0.827

Low Temperature 3.00 1.200

Snowfall 10.00 4.833

Housing Starts 5.00 2.333

Analysis of Variance Table (ANOVA)

Source Degrees of Freedom Sum of Squares Mean Square

Regression 4 335.20 83.80

Error 21 606.40 28.88

Total 25 941.60

Table of the F-Distribution

Critical values for right-hand tail area equal to 0.05

Numerator: df1 and Denominator: df2

df1

df2 1 2 4 10 20

1 161.45 199.50 224.58 241.88 248.01

2 18.513 19.000 19.247 19.396 19.446

4 7.7086 6.9443 6.3882 5.9644 5.8025

10 4.9646 4.1028 3.4780 2.9782 2.7740

20 4.3512 3.4928 2.8661 2.3479 2.1242

One of her goals is to forecast the sales of the Chicago metropolitan area next year. For that area and for

the upcoming year, Williams obtains the following projections: heating oil prices will be $0.10 above
average, the temperature in Chicago will be 5 degrees below normal, snowfall will be 3 inches above

average, and housing starts will be 3% below average.

In addition to making forecasts and testing the signi cance of the estimated coe cients, she plans to

perform diagnostic tests to verify the validity of the model's results.

Question #59 - 64 of 195 Question ID: 1208350

According to the model and the data for the Chicago metropolitan area, the forecast of generator sales is:
A) $55 million above average.

B) $35.2 million above the average.

C) $65 million above the average.

Question #60 - 64 of 195 Question ID: 1208351

Williams proceeds to test the hypothesis that none of the independent variables has signi cant
explanatory power. He concludes that, at a 5% level of signi cance:

A) none of the independent variables has explanatory power, because the calculated F-statistic does
not exceed its critical value.

B) at least one of the independent variables has explanatory power, because the calculated F-statistic
exceeds its critical value.

C) all of the independent variables have explanatory power, because the calculated F-statistic
exceeds its critical value.

Question #61 - 64 of 195 Question ID: 1208352

With respect to testing the validity of the model's results, Williams may wish to perform:

A) a Durbin-Watson test, but not a Breusch-Pagan test.

B) both a Durbin-Watson test and a Breusch-Pagan test.

C) a Breusch-Pagan test, but not a Durbin-Watson test.

Question #62 - 64 of 195 Question ID: 1208353

Williams decides to use two-tailed tests on the individual variables, at a 5% level of signi cance, to

determine whether electric generator sales are explained by each of them individually. Williams concludes

that:

A) all of the variables are statistically signi cant in explaining sales.

B) all of the variables except snowfall are statistically signi cant in explaining sales.

C) all of the variables except snowfall and housing starts are statistically signi cant in explaining
sales.
Question #63 - 64 of 195 Question ID: 1208354

When Williams ran the model, the computer said the R2 is 0.233. She examines the other output and
concludes that this is the:

A) adjusted R2 value.

B) unadjusted R2 value.

C) neither the unadjusted nor adjusted R2 value, nor the coe cient of correlation.

Question #64 - 64 of 195 Question ID: 1208355

In preparing and using this model, Williams has least likely relied on which of the following assumptions?

A) There is a linear relationship between the independent variables.

B) The disturbance or error term is normally distributed.

C) The residuals are homoscedastic.

Autumn Voiku is attempting to forecast sales for Brook eld Farms based on a multiple regression model.
Voiku has constructed the following model:

sales = b0 + (b1 × CPI) + (b2 × IP) + (b3 × GDP) + εt

Where:

sales = $ change in sales (in 000's)

CPI = change in the consumer price index

IP = change in industrial production (millions)

GDP = change in GDP (millions)

All changes in variables are in percentage terms.

Voiku uses monthly data from the previous 180 months of sales data and for the independent variables.

The model estimates (with coe cient standard errors in parentheses) are:

SALES = 10.2 + (4.6 × CPI) + (5.2 × IP) + (11.7 × GDP)

(5.4) (3.5) (5.9) (6.8)

The sum of squared errors is 140.3 and the total sum of squares is 368.7.

Voiku calculates the unadjusted R2, the adjusted R2, and the standard error of estimate to be 0.592, 0.597,
and 0.910, respectively.

Voiku is concerned that one or more of the assumptions underlying multiple regression has been violated
in her analysis. In a conversation with Dave Grimbles, CFA, a colleague who is considered by many in the
 rm to be a quant specialist, Voiku says, "It is my understanding that there are ve assumptions of a

multiple regression model:"

There is a linear relationship between the dependent and

Assumption 1:
independent variables.

The independent variables are not random, and there is zero

Assumption 2:
correlation between any two of the independent variables.

The residual term is normally distributed with an expected value of

Assumption 3:
zero.

Assumption 4: The residuals are serially correlated.

Assumption 5: The variance of the residuals is constant.

Grimbles agrees with Miller's assessment of the assumptions of multiple regression.

Voiku tests and fails to reject each of the following four null hypotheses at the 99% con dence interval:

Hypothesis 1: The coe cient on GDP is negative.

Hypothesis 2: The intercept term is equal to –4.

A 2.6% increase in the CPI will result in an increase in sales of more

Hypothesis 3:
than 12.0%.

A 1% increase in industrial production will result in a 1% decrease in

Hypothesis 4:
sales.

Figure 1: Partial table of the Student's t-distribution (One-tailed probabilities)

df p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005

170 1.287 1.654 1.974 2.348 2.605

176 1.286 1.654 1.974 2.348 2.604

180 1.286 1.653 1.973 2.347 2.603

Figure 2: Partial F-Table critical values for right-hand tail area equal to 0.05

df1 = 1 df1 = 3 df1 = 5

df2 = 170 3.90 2.66 2.27

df2 = 176 3.89 2.66 2.27

df2 = 180 3.89 2.65 2.26

Figure 3: Partial F-Table critical values for right-hand tail area equal to 0.025

df1 = 1 df1 = 3 df1 = 5

df2 = 170 5.11 3.19 2.64

df2 = 176 5.11 3.19 2.64

df2 = 180 5.11 3.19 2.64

Question #65 - 70 of 195 Question ID: 1208302

Concerning the assumptions of multiple regression, Grimbles is:

A) incorrect to agree with Voiku’s list of assumptions because two of the assumptions are stated
incorrectly.

B) correct to agree with Voiku’s list of assumptions.

C) incorrect to agree with Voiku’s list of assumptions because one of the assumptions is stated
incorrectly.

Question #66 - 70 of 195 Question ID: 1208303

For which of the four hypotheses did Voiku incorrectly fail to reject the null, based on the data given in the

problem?

A) Hypothesis 4.

B) Hypothesis 2.

C) Hypothesis 3.

Question #67 - 70 of 195 Question ID: 1208304

The most appropriate decision with regard to the F-statistic for testing the null hypothesis that all of the

independent variables are simultaneously equal to zero at the 5 percent signi cance level is to:

A) reject the null hypothesis because the F-statistic is larger than the critical F-value of 3.19.

B) reject the null hypothesis because the F-statistic is larger than the critical F-value of 2.66.

C) fail to reject the null hypothesis because the F-statistic is smaller than the critical F-value of 2.66.

Question #68 - 70 of 195 Question ID: 1208305

Regarding Voiku's calculations of R2 and the standard error of estimate, she is:

A) incorrect in her calculation of both the unadjusted R2 and the standard error of estimate.

B) incorrect in her calculation of the unadjusted R2 but correct in her calculation of the standard

error of estimate.

C) correct in her calculation of the unadjusted R2 but incorrect in her calculation of the standard

error of estimate.
Question #69 - 70 of 195 Question ID: 1208306

The multiple regression, as speci ed, most likely su ers from:

A) serial correlation of the error terms.

B) multicollinearity.

C) heteroskedasticity.

Question #70 - 70 of 195 Question ID: 1208307

A 90 percent con dence interval for the coe cient on GDP is:

A) –1.9 to 19.6.

B) 0.5 to 22.9.

C) –1.5 to 20.0.

Question #71 of 195 Question ID: 1208365

An analyst is trying to determine whether stock market returns are related to size and the market-to-book
ratio, through the use of multiple regression. However, the analyst uses returns of portfolios of stocks

instead of individual stocks in the regression. Which of the following is a valid reason why the analyst uses

portfolios? The use of portfolios:

A) reduces the standard deviation of the residual, which will increase the power of the test.

B) will increase the power of the test by giving the test statistic more degrees of freedom.

C) will remove the existence of multicollinearity from the data, reducing the likelihood of type II error.

Manuel Mercado, CFA has performed the following two regressions on sales data for a given industry. He

wants to forecast sales for each quarter of the upcoming year.

Model ONE

Regression Statistics

Multiple R 0.941828

R2 0.887039

Adjusted R2 0.863258

Standard Error 2.543272

Observations 24

Durbin-Watson test statistic = 0.7856

ANOVA

df SS MS F Signi cance F

Regression 4 965.0619 241.2655 37.30006 9.49E−09

Residual 19 122.8964 6.4682

Total 23 1087.9583

Coe cients Standard Error t-Statistic

Intercept 31.40833 1.4866 21.12763

Q1 −3.77798 1.485952 −2.54246

Q2 −2.46310 1.476204 −1.66853

Q3 −0.14821 1.470324 −0.10080

TREND 0.851786 0.075335 11.20848

Model TWO

Regression Statistics

Multiple R 0.941796

R2 0.886979

Adjusted R2 0.870026

Standard Error 2.479538

Observations 24

Durbin-Watson test statistic = 0.7860

df SS MS F Signi cance F

Regression 3 964.9962 321.6654 52.3194 1.19E−09

Residual 20 122.9622 6.14811

Total 23 1087.9584

Coe cients Standard Error t-Statistic

Intercept 31.32888 1.228865 25.49416

Q1 −3.70288 1.253493 −2.95405

Q2 −2.38839 1.244727 −1.91881

TREND 0.85218 0.073991 11.51732

The dependent variable is the level of sales for each quarter, in $ millions, which began with the rst

quarter of the rst year. Q1, Q2, and Q3 are seasonal dummy variables representing each quarter of the

year. For the rst four observations the dummy variables are as follows: Q1:(1,0,0,0), Q2:(0,1,0,0), Q3:

(0,0,1,0). The TREND is a series that begins with one and increases by one each period to end with 24. For
all tests, Mercado will use a 5% level of signi cance. Tests of coe cients will be two-tailed, and all others

are one-tailed.

Question #72 - 77 of 195 Question ID: 1208374

Which model would be a better choice for making a forecast?

A) Model TWO because it has a higher adjusted R2.

B) Model TWO because serial correlation is not a problem.

C) Model ONE because it has a higher R2.

Question #73 - 77 of 195 Question ID: 1208375

Using Model ONE, what is the sales forecast for the second quarter of the next year?

A) $51.09 million.

B) $56.02 million.

C) $46.31 million.

Question #74 - 77 of 195 Question ID: 1208376

Which of the coe cients that appear in both models are not signi cant at the 5% level in a two-tailed test?

A) The coe cients on Q1 and Q2 only.

B) The intercept only.

C) The coe cient on Q2 only.

Question #75 - 77 of 195 Question ID: 1208377

If it is determined that conditional heteroskedasticity is present in model one, which of the following

inferences are most accurate?

A) Regression coe cients will be biased but standard errors will be unbiased.

B) Both the regression coe cients and the standard errors will be biased.

C) Regression coe cients will be unbiased but standard errors will be biased.
Question #76 - 77 of 195 Question ID: 1208378

Mercado probably did not include a fourth dummy variable Q4, which would have had 0, 0, 0, 1 as its rst
four observations because:

A) the intercept is essentially the dummy for the fourth quarter.

B) it would not have been signi cant.

C) it would have lowered the explanatory power of the equation.

Question #77 - 77 of 195 Question ID: 1208379

If Mercado determines that Model TWO is the appropriate speci cation, then he is essentially saying that

for each year, value of sales from quarter three to four is expected to:

A) grow, but by less than $1,000,000.

B) grow by more than $1,000,000.

C) remain approximately the same.

Question #78 of 195 Question ID: 1208462

Which of the following is a potential remedy for multicollinearity?

A) Omit one or more of the collinear variables.

B) Take rst di erences of the dependent variable.

C) Add dummy variables to the regression.

Question #79 of 195 Question ID: 1208267

Henry Hilton, CFA, is undertaking an analysis of the bicycle industry. He hypothesizes that bicycle sales

(SALES) are a function of three factors: the population under 20 (POP), the level of disposable income
(INCOME), and the number of dollars spent on advertising (ADV). All data are measured in millions of units.

Hilton gathers data for the last 20 years and estimates the following equation (standard errors in

parentheses):

SALES = α + 0.004 POP + 1.031 INCOME + 2.002 ADV

(0.005) (0.337) (2.312)

The critical t-statistic for a 95% con dence level is 2.120. Which of the independent variables is statistically

di erent from zero at the 95% con dence level?

A) INCOME only.

B) INCOME and ADV.

C) ADV only.

Question #80 of 195 Question ID: 1208385

The management of a large restaurant chain believes that revenue growth is dependent upon the month
of the year. Using a standard 12 month calendar, how many dummy variables must be used in a

regression model that will test whether revenue growth di ers by month?

A) 11.

B) 12.

C) 13.

Question #81 of 195 Question ID: 1208357

Consider the following analysis of variance (ANOVA) table:

Source Sum of squares Degrees of freedom Mean square

Regression 20 1 20

Error 80 40 2

Total 100 41

The F-statistic for the test of the t of the model is closest to:

A) 0.10.

B) 0.25.

C) 10.00.
Question #82 of 195 Question ID: 1208410

Which of the following is least likely a method used to detect heteroskedasticity?

A) Durbin-Watson test.

B) Breusch-Pagan test.

C) Scatter plot.

Question #83 of 195 Question ID: 1208323

David Black wants to test whether the estimated beta in a market model is equal to one. He collected a

sample of 60 monthly returns on a stock and estimated the regression of the stock's returns against those

of the market. The estimated beta was 1.1, and the standard error of the coe cient is equal to 0.4. What

should Black conclude regarding the beta if he uses a 5% level of signi cance? The null hypothesis that
beta is:

A) equal to one cannot be rejected.

B) not equal to one cannot be rejected.

C) equal to one is rejected.

Question #84 of 195 Question ID: 1208448

An analyst is estimating whether a fund's excess return for a month is dependent on interest rates and

whether the S&P 500 has increased or decreased during the month. The analyst collects 90 monthly return

premia (the return on the fund minus the return on the S&P 500 benchmark), 90 monthly interest rates,
and 90 monthly S&P 500 index returns from July 1999 to December 2006. After estimating the regression

equation, the analyst nds that the correlation between the regressions residuals from one period and the

residuals from the previous period is 0.145 (DW=1.71). Which of the following is most accurate at a 0.05

level of signi cance, based solely on the information provided? The analyst:

A) can conclude that the regression exhibits heteroskedasticity, but cannot conclude that the
regression exhibits serial correlation.

B) can conclude that the regression exhibits serial correlation, but cannot conclude that the
regression exhibits heteroskedasticity.

C) cannot conclude that the regression exhibits either serial correlation or heteroskedasticity.
Question #85 of 195 Question ID: 1208411

Consider the following graph of residuals and the regression line from a time-series regression:

These residuals exhibit the regression problem of:

A) homoskedasticity.

B) autocorrelation.

C) heteroskedasticity.

An analyst is interested in forecasting the rate of employment growth and instability for 254 metropolitan

areas around the United States. The analyst's main purpose for these forecasts is to estimate the demand

for commercial real estate in each metro area. The independent variables in the analysis represent the
percentage of employment in each industry group.

Regression of Employment Growth Rates and Employment Instability on

Industry Mix Variables for 254 U.S. Metro Areas

Model 1 Model 2

Employment Relative Employment

Dependent Variable
Growth Rate Instability

Coe cient Coe cient

Independent Variables t-value t-value
Estimate Estimate

Intercept –2.3913 –0.713 3.4626 0.623

% Construction
0.2219 4.491 0.1715 2.096
Employment

% Manufacturing
0.0136 0.393 0.0037 0.064
Employment

% Wholesale Trade
–0.0092 –0.171 0.0244 0.275
Employment

% Retail Trade
–0.0012 –0.031 –0.0365 –0.578
Employment

% Financial Services
0.0605 1.271 –0.0344 –0.437
Employment

% Other Services 0.1037 2.792 0.0208 0.338

Employment
R² 0.289 0.047

Adjusted R² 0.272 0.024

F-Statistic 16.791 2.040

Standard error of
0.546 0.345
estimate

Question #86 - 91 of 195 Question ID: 1208336

Based on the data given, which independent variables have both a statistically and an economically

signi cant impact (at the 5% level) on metropolitan employment growth rates?

A) "% Wholesale Trade Employment" and "% Retail Trade" only.

B) "% Construction Employment" and "% Other Services Employment" only.

C) "% Manufacturing Employment," "% Financial Services Employment," "% Wholesale Trade
Employment," and "% Retail Trade" only.

Question #87 - 91 of 195 Question ID: 1208337

The coe cient standard error for the independent variable "% Construction Employment" under the

relative employment instability model is closest to:

A) 0.0818.

B) 0.3595.

C) 2.2675.

Question #88 - 91 of 195 Question ID: 1208338

Which of the following best describes how to interpret the R2 for the employment growth rate model?

Changes in the value of the:

A) independent variables explain 28.9% of the variability of the employment growth rate.

B) independent variables cause 28.9% of the variability of the employment growth rate.

C) employment growth rate explain 28.9% of the variability of the independent variables.

Question #89 - 91 of 195 Question ID: 1208339

Using the following forecasts for Cedar Rapids, Iowa, the forecasted employment growth rate for that city
is closest to:

Construction employment 10%

Manufacturing 30%

Wholesale trade 5%

Retail trade 20%

Financial services 15%

Other services 20%

A) 3.15%.

B) 3.22%.

C) 5.54%.

Question #90 - 91 of 195 Question ID: 1208340

The 95% con dence interval for the coe cient estimate for "% Construction Employment" from the

relative employment instability model is closest to:

A) 0.0111 to 0.3319.

B) –0.0740 to 0.4170.

C) 0.0897 to 0.2533.

Question #91 - 91 of 195 Question ID: 1208341

One possible problem that could jeopardize the validity of the employment growth rate model is
multicollinearity. Which of the following would most likely suggest the existence of multicollinearity?

A) The Durbin–Watson statistic di ers su ciently from 2.

B) The F-statistic suggests that the overall regression is signi cant, however the regression
coe cients are not individually signi cant.

C) The variance of the observations has increased over time.

Using a recent analysis of salaries (in $1,000) of nancial analysts, a regression of salaries on education,

experience, and gender is run. (Gender equals one for men and zero for women.) The regression results

from a sample of 230 nancial analysts are presented below, with t-statistics in parenthesis.

Salary = 34.98 + 1.2 Education + 0.5 Experience + 6.3 Gender

 (29.11) (8.93) (2.98) (1.58)

Timbadia also runs a multiple regression to gain a better understanding of the relationship between

lumber sales, housing starts, and commercial construction. The regression uses a large data set of lumber

sales as the dependent variable with housing starts and commercial construction as the independent
variables. The results of the regression are:

Coe cient Standard Error t-statistics

Intercept 5.337 1.71 3.14

Housing starts 0.76 0.09 8.44

Commercial Construction 1.25 0.33 3.78

Finally, Timbadia runs a regression between the returns on a stock and its industry index with the

following results:

Coe cient Standard Error

Intercept 2.1 2.01

Industry Index 1.9 0.31

Standard error of estimate = 15.1

Correlation coe cient = 0.849

Question #92 - 97 of 195 Question ID: 1208403

What is the expected salary (in $1,000) of a woman with 16 years of education and 10 years of experience?

A) 54.98.

B) 65.48.

C) 59.18.

Question #93 - 97 of 195 Question ID: 1208404

Holding everything else constant, do men get paid more than women? Use a 5% level of signi cance.

A) No, since the t-value does not exceed the critical value of 1.65.

B) No, since the t-value does not exceed the critical value of 1.96.

C) Yes, since the t-value exceeds the critical value of 1.56.

Question #94 - 97 of 195 Question ID: 1208405

Construct a 95% con dence interval for the slope coe cient for Housing Starts.

A) 0.76 ± 1.96(0.09).

B) 0.76 ± 1.96(8.44).

C) 1.25 ± 1.96(0.33).

Question #95 - 97 of 195 Question ID: 1208406

Construct a 95% con dence interval for the slope coe cient for Commercial Construction.

A) 1.25 ± 1.96(3.78).

B) 1.25 ± 1.96(0.33).

C) 0.76 ± 1.96(0.09).

Question #96 - 97 of 195 Question ID: 1208407

If the return on the industry index is 4%, the stock's expected return would be:

A) 11.2%.

B) 9.7%.

C) 7.6%.

Question #97 - 97 of 195 Question ID: 1208408

The percentage of the variation in the stock return explained by the variation in the industry index return

is closest to:

A) 72.1%.

B) 63.2%.

C) 84.9%.

Werner Baltz, CFA, has regressed 30 years of data to forecast future sales for National Motor Company

based on the percent change in gross domestic product (GDP) and the change in retail price of a U.S.
gallon of fuel. The results are presented below.

Predictor Coe cient Standard Error

of the
Coe cient
 Intercept 78 13.710

Δ GDP 30.22 12.120

Δ $ Fuel −412.39 183.981

Analysis of Variance Table (ANOVA)

Source Degrees of Freedom Sum of Squares

Regression 291.30

Error 27 132.12

Total 29 423.42

Baltz is concerned that violations of regression assumptions may a ect the utility of the model for
forecasting purposes. He is especially concerned about a situation where the coe cient estimate for an

independent variable could take on opposite sign to that predicted.

Baltz is also concerned about important variables being left out of the model. He makes the following

statement:

"If an omitted variable is correlated with one of the independent variables included in the model, the

standard errors and coe cient estimates will be inconsistent."

Question #98 - 103 of 195 Question ID: 1208416

If GDP rises 2.2% and the price of fuels falls $0.15, Baltz's model will predict Company sales to be (in $

millions) closest to:

A) $128.00

B) $82.00

C) $206.00

Question #99 - 103 of 195 Question ID: 1208417

Baltz proceeds to test the hypothesis that none of the independent variables has signi cant explanatory

power. He concludes that, at a 5% level of signi cance:

A) none of the independent variables has explanatory power, because the calculated F-statistic does
not exceed its critical value.

B) all of the independent variables have explanatory power, because the calculated F-statistic
exceeds its critical value.

C) at least one of the independent variables has explanatory power, because the calculated F-statistic
exceeds its critical value.
Question #100 - 103 of 195 Question ID: 1208418

Baltz then tests the individual variables, at a 5% level of signi cance, to determine whether sales are

explained by changes in GDP and fuel prices. Baltz concludes that:

A) only GDP changes explain changes in sales.

B) neither GDP nor fuel price changes explain changes in sales.

C) both GDP and fuel price changes explain changes in sales.

Question #101 - 103 of 195 Question ID: 1208419

With regards to violation of regression assumptions, Baltz should most appropriately be concerned about:

A) Serial correlation.

B) Conditional Heteroskedasticity.

C) Multicollinearity.

Question #102 - 103 of 195 Question ID: 1208420

Regarding the statement about omitted variables made by Baltz, which of the following is most accurate?
The statement:

A) is incorrect about coe cient estimates but correct about standard errors.

B) is incorrect about standard errors but correct about coe cient estimates.

C) is correct.

Question #103 - 103 of 195 Question ID: 1208421

Presence of conditional heteroskedasticity is least likely to a ect the:

A) computed t-statistic.

B) coe cient estimates.

C) computed F-statistic.

Question #104 of 195 Question ID: 1208412

Which of the following statements regarding heteroskedasticity is least accurate?

A) Heteroskedasticity may occur in cross-sectional or time-series analyses.

B) Heteroskedasticity results in an estimated variance that is too small and, therefore, a ects
statistical inference.

C) The assumption of linear regression is that the residuals are heteroskedastic.

Question #105 of 195 Question ID: 1208446

An analyst is estimating whether company sales is related to three economic variables. The regression

exhibits conditional heteroskedasticity, serial correlation, and multicollinearity. The analyst uses Hansen's
procedure to adjust for the standard errors. Which of the following is most accurate? The:

A) regression will still exhibit serial correlation and multicollinearity, but the heteroskedasticity
problem will be solved.

B) regression will still exhibit heteroskedasticity and multicollinearity, but the serial correlation
problem will be solved.

C) regression will still exhibit multicollinearity, but the heteroskedasticity and serial correlation
problems will be solved.

A real estate agent wants to develop a model to predict the selling price of a home. The agent believes that

the most important variables in determining the price of a house are its size (in square feet) and the

number of bedrooms. Accordingly, he takes a random sample of 32 homes that has recently been sold.

The results of the regression are:

Coe cient Standard Error t-statistics

Intercept 66,500 59,292 1.12

House Size 74.30 21.11 3.52

Number of Bedrooms 10306 3230 3.19

R2 = 0.56; F = 40.73

Selected F- table values for signi cance level of 0.05:

1 2

28 4.20 3.34

29 4.18 3.33

30 4.17 3.32

32 4.15 3.29

(Degrees of freedom for the numerator in columns; Degrees of freedom for the denominator

in rows)
Additional information regarding this multiple regression:

1. Variance of error is not constant across the 32 observations.

2. The two variables (size of the house and the number of bedrooms) are highly correlated.
3. The error variance is not correlated with the size of the house nor with the number of bedrooms.

Question #106 - 111 of 195 Question ID: 1208423

The predicted price of a house that has 2,000 square feet of space and 4 bedrooms is closest to:

A) $114,000

B) $185,000

C) $256,000

Question #107 - 111 of 195 Question ID: 1208424

The conclusion from the hypothesis test of H0: b1 = b2 = 0, is that the null hypothesis should:

A) be rejected as the calculated F of 40.73 is greater than the critical value of 3.29.

B) not be rejected as the calculated F of 40.73 is greater than the critical value of 3.29.

C) be rejected as the calculated F of 40.73 is greater than the critical value of 3.33.

Question #108 - 111 of 195 Question ID: 1208425

The regression results indicate that at a 5% level of signi cance:

A) the slopes are signi cant but the intercept is not.

B) the slopes are not signi cant but the intercept is signi cant.

C) the slopes and the intercept are both statistically signi cant.

Question #109 - 111 of 195 Question ID: 1208426

Which of the following is most likely to present a problem in using this regression for forecasting?

A) heteroskedasticity.

B) autocorrelation.

C) multicollinearity.
Question #110 - 111 of 195 Question ID: 1208427

Based on the information given in this question, heteroskedasticity is:

A) present and a statistical inference is unreliable.

B) not present and a statistical inference is reliable.

C) present but a statistical inference is still reliable.

Question #111 - 111 of 195 Question ID: 1208428

For this regression model, which condition is most likely?:

A) Coe cient estimates will be consistent but standard error may be biased.

B) Coe cient estimates may be unreliable and standard error may be biased.

C) Coe cient estimates may be inconsistent but standard error will be unbiased.

Question #112 of 195 Question ID: 1208475

Which of the following is least likely to result in misspeci cation of a regression model?

A) Using a lagged dependent variable as an independent variable.

B) Transforming a variable.

C) Measuring independent variables with errors.

Question #113 of 195 Question ID: 1208459

An analyst is testing to see whether a dependent variable is related to three independent variables. He
nds that two of the independent variables are highly correlated with each other, but that the correlation

is spurious. Which of the following is most accurate? There is:

A) evidence of multicollinearity but not serial correlation.

B) evidence of multicollinearity and serial correlation.

C) no evidence of multicollinearity and serial correlation.

Miles Mason, CFA, works for ABC Capital, a large money management company based in New York. Mason

has several years of experience as a nancial analyst, but is currently working in the marketing
department developing materials to be used by ABC's sales team for both existing and prospective clients.
ABC Capital's client base consists primarily of large net worth individuals and Fortune 500 companies. ABC

invests its clients' money in both publicly traded mutual funds as well as its own investment funds that are
managed in-house. Five years ago, roughly half of its assets under management were invested in the

publicly traded mutual funds, with the remaining half in the funds managed by ABC's investment team.
Currently, approximately 75% of ABC's assets under management are invested in publicly traded funds,
with the remaining 25% being distributed among ABC's private funds. The managing partners at ABC

would like to shift more of its client's assets away from publicly-traded funds into ABC's proprietary funds,
ultimately returning to a 50/50 split of assets between publicly traded funds and ABC funds. There are
three key reasons for this shift in the rm's asset base. First, ABC's in-house funds have outperformed

other funds consistently for the past ve years. Second, ABC can o er its clients a reduced fee structure on
funds managed in-house relative to other publicly traded funds. Lastly, ABC has recently hired a top fund

manager away from a competing investment company and would like to increase his assets under
management.

ABC Capital's upper management requested that current clients be surveyed in order to determine the
cause of the shift of assets away from ABC funds. Results of the survey indicated that clients feel there is a

lack of information regarding ABC's funds. Clients would like to see extensive information about ABC's
past performance, as well as a sensitivity analysis showing how the funds will perform in varying market

scenarios. Mason is part of a team that has been charged by upper management to create a marketing
program to present to both current and potential clients of ABC. He needs to be able to demonstrate a
history of strong performance for the ABC funds, and, while not promising any measure of future

performance, project possible return scenarios. He decides to conduct a regression analysis on all of ABC's
in-house funds. He is going to use 12 independent economic variables in order to predict each particular

fund's return. Mason is very aware of the many factors that could minimize the e ectiveness of his
regression model, and if any are present, he knows he must determine if any corrective actions are
necessary. Mason is using a sample size of 121 monthly returns.

Question #114 - 119 of 195 Question ID: 1208453

In order to conduct an F-test, what would be the degrees of freedom used (dfnumerator; dfdenominator)?

A) 108; 12.

B) 12; 108.

C) 11; 120.

Question #115 - 119 of 195 Question ID: 1208454

In regard to multiple regression analysis, which of the following statements is most accurate?

A) Adjusted R2 always decreases as independent variables increase.

B) Adjusted R2 is less than R2.

C) R2 is less than adjusted R2.

Question #116 - 119 of 195 Question ID: 1208455

Which of the following tests is most likely to be used to detect autocorrelation?

A) Dickey-Fuller.

B) Breusch-Pagan.

C) Durbin-Watson.

Question #117 - 119 of 195 Question ID: 1208456

One of the most popular ways to correct heteroskedasticity is to:

A) adjust the standard errors.

B) improve the speci cation of the model.

C) use robust standard errors.

Question #118 - 119 of 195 Question ID: 1208457

Which of the following statements regarding the Durbin-Watson statistic is most accurate? The Durbin-
Watson statistic:

A) can only be used to detect positive serial correlation.

B) is approximately equal to 1 if the error terms are not serially correlated.

C) only uses error terms in its computations.

Question #119 - 119 of 195 Question ID: 1208458

If a regression equation shows that no individual t-tests are signi cant, but the F-statistic is signi cant, the

regression probably exhibits:

A) heteroskedasticity.

B) multicollinearity.
C) serial correlation.

Question #120 of 195 Question ID: 1208400

Which of the following statements least accurately describes one of the fundamental multiple regression

assumptions?

A) The variance of the error terms is not constant (i.e., the errors are heteroskedastic).

B) The independent variables are not random.

C) The error term is normally distributed.

Question #121 of 195 Question ID: 1208332

Consider the following estimated regression equation, with calculated t-statistics of the estimates as
indicated:

AUTOt = 10.0 + 1.25 PIt + 1.0 TEENt – 2.0 INSt

with a PI calculated t-statstic of 0.45, a TEEN calculated t-statstic of 2.2, and an INS calculated t-
statstic of 0.63.

The equation was estimated over 40 companies. The predicted value of AUTO if PI is 4, TEEN is 0.30, and

INS = 0.6 is closest to:

A) 14.10.

B) 17.50.

C) 14.90.

Question #122 of 195 Question ID: 1208330

Bill Samuels, a summer intern at Capulito Securities, is evaluating the results of a regression model. The
model was developed by the Capulito's senior economist several years ago, and Samuels decided to

evaluate the model using more recent data. The model provides a forecast for the price of oil (per barrel in
USD) based on the following independent variables:

LNG: The natural log of the global GDP (in trillions of USD) for the last quarter

USD: The trade-weighted value of the US dollar versus a basket of global currencies

GLD: The average price of an ounce of gold over the last quarter (in USD).

The regression output using the last ten years of quarterly data is shown below:

Variable Coe cient Standard Error

Intercept 23.12 1.975

LNG 4.83 0.972

USD -1.22 0.25

GLD 0.012 0.0008

At a ve percent level of signi cance, the coe cient for LNG is most likely:

A) signi cantly di erent from 4.

B) signi cantly greater than 3.

C) signi cantly less than 6.

Question #123 of 195 Question ID: 1208278

Jacob Warner, CFA, is evaluating a regression analysis recently published in a trade journal that
hypothesizes that the annual performance of the S&P 500 stock index can be explained by movements in

the Federal Funds rate and the U.S. Producer Price Index (PPI). Which of the following statements
regarding his analysis is most accurate?

A) If the p-value of a variable is less than the signi cance level, the null hypothesis cannot be
rejected.

B) If the p-value of a variable is less than the signi cance level, the null hypothesis can be rejected.

C) If the t-value of a variable is less than the signi cance level, the null hypothesis cannot be rejected.

William Brent, CFA, is the chief nancial o cer for Mega Flowers, one of the largest producers of owers
and bedding plants in the Western United States. Mega Flowers grows its plants in three large nursery

facilities located in California. Its products are sold in its company-owned retail nurseries as well as in
large, home and garden "super centers". For its retail stores, Mega Flowers has designed and implemented
marketing plans each season that are aimed at its consumers in order to generate additional sales for

certain high-margin products. To fully implement the marketing plan, additional contract salespeople are
seasonally employed.
For the past several years, these marketing plans seemed to be successful, providing a signi cant boost in

sales to those speci c products highlighted by the marketing e orts. However, for the past year, revenues
have been at, even though marketing expenditures increased slightly. Brent is concerned that the
expensive seasonal marketing campaigns are simply no longer generating the desired returns, and should

either be signi cantly modi ed or eliminated altogether. He proposes that the company hire additional,
permanent salespeople to focus on selling Mega Flowers' high-margin products all year long. The chief

operating o cer, David Johnson, disagrees with Brent. He believes that although last year's results were
disappointing, the marketing campaign has demonstrated impressive results for the past ve years, and
should be continued. His belief is that the prior years' performance can be used as a gauge for future

results, and that a simple increase in the sales force will not bring about the desired results.

Brent gathers information regarding quarterly sales revenue and marketing expenditures for the past ve
years. Based upon historical data, Brent derives the following regression equation for Mega Flowers

(stated in millions of dollars):

Expected Sales= 12.6 + 1.6 (Marketing Expenditures)+ 1.2 (# of Salespeople)

Brent shows the equation to Johnson and tells him, "This equation shows that a $1 million increase in
marketing expenditures will increase the independent variable by $1 .6 million, all other factors being
equal." Johnson replies , "It also appears that sales will equal $12.6 million if all independent variables are

equal to zero."

Question #124 - 129 of 195 Question ID: 1208295

In regard to their conversation about the regression equation:

A) Brent’s statement is incorrect; Johnson’s statement is correct.

B) Brent’s statement is correct; Johnson’s statement is incorrect.

C) Brent’s statement is correct; Johnson’s statement is correct.

Question #125 - 129 of 195 Question ID: 1208296

Using data from the past 20 quarters, Brent calculates the t-statistic for marketing expenditures to be 3.68
and the t-statistic for salespeople at 2.19. At a 5% signi cance level, the two-tailed critical values are tc = +/-

2.127. This most likely indicates that:

A) the null hypothesis should not be rejected.

B) the t-statistic has 18 degrees of freedom.

C) both independent variables are statistically signi cant.

Question #126 - 129 of 195 Question ID: 1208297

Brent calculated that the sum of squared errors (SSE) for the variables is 267. The mean squared error

(MSE) would be:

A) 14.055.

B) 14.831.

C) 15.706.

Question #127 - 129 of 195 Question ID: 1208298

Brent is trying to explain the concept of the standard error of estimate (SEE) to Johnson. In his explanation,
Brent makes three points about the SEE:

Point 1: The SEE is the standard deviation of the di erences between the estimated values for the

independent variables and the actual observations for the independent variable.
Point 2: Any violation of the basic assumptions of a multiple regression model is going to a ect the
SEE.

Point 3: If there is a strong relationship between the variables and the SSE is small, the individual
estimation errors will also be small.

How many of Brent's points are most accurate?

A) 2 of Brent’s points are correct.

B) All 3 of Brent’s points are correct.

C) 1 of Brent’s points are correct.

Question #128 - 129 of 195 Question ID: 1208299

Assuming that next year's marketing expenditures are $3,500,000 and there are ve salespeople,
predicted sales for Mega Flowers should will be:

A) $24,200,000.

B) $11,600,000.

C) $24,000,000.

Question #129 - 129 of 195 Question ID: 1208300

Brent would like to further investigate whether at least one of the independent variables can explain a
signi cant portion of the variation of the dependent variable. Which of the following methods would be

best for Brent to use?

A) The multiple coe cient of determination.

B) The F-statistic.

C) An ANOVA table.

Question #130 of 195 Question ID: 1208356

Consider the following analysis of variance table:

Source Sum of Squares Df Mean Square

Regression 20 1 20

Error 80 20 4

Total 100 21

The F-statistic for a test of the overall signi cance of the model is closest to:

A) 0.2

B) 0.05

C) 5

Quin Tan Liu, CFA is looking at the retail property sector for her manager. He is undertaking a top down
review as she feels this is the best way to analyze the industry segment. To predict U.S property starts

(housing), she has used regression analysis.

Liu included the following variables in his analysis:

Average nominal interest rates during each year (as a decimal)

Annual GDP per capita in $'000

Given these variables the following output was generated from 30 years of data:

Exhibit 1 – Results from regressing housing starts (in millions) on interest rates and GDP per capita

Coe cient StandardError T-statistic

Intercept 0.42 3.1

Interest rate − 1.0 − 2.0

GDP per capita 0.03 0.7

ANOVA df SS MSS F

Regression 2 3.896 1.948 21.644

Residual 27 2.431 0.090

Total 29 6.327

Observations 30
Durbin Watson 1.22

Exhibit 2 - Critical Values for Student's t-Distribution

Degrees of Area in Upper Tail

Freedom 5% 2.5%

26 1.706 2.056

27 1.703 2.052

28 1.701 2.048

29 1.699 2.045

30 1.697 2.040

31 1.696 2.040

Exhibit 3 - Critical Values for F-Distribution at 5% Level of Signi cance

Degrees of Freedom for Degrees of Freedom (df) for the Numerator

the Denominator 1 2 3

26 4.23 3.37 2.98

27 4.21 3.35 2.96

28 4.20 3.34 2.95

29 4.18 3.33 2.93

30 4.17 3.32 2.92

31 4.16 3.31 2.91

32 4.15 3.30 2.90

The following variable estimates have been made for 20X7

GDP per capita = $46,700

Interest rate = 7%

Question #131 - 136 of 195 Question ID: 1208343

Using the regression model represented in Exhibit 1, what is the predicted number of housing starts for
20X7?

A) 1,394

B) 1,394,420

C) 1,751,000

Question #132 - 136 of 195 Question ID: 1208344

The 90% con dence interval for the interest rate coe cient is:

A) −1.852 to −0.149

B) −1.850 to −0.151

C) −3.000 to +1.000

Question #133 - 136 of 195 Question ID: 1208345

Is the regression coe cient for the interest rate signi cantly di erent from zero at the 5% level of

signi cance?

A) Yes, because │−2.0│> 1.703

B) No, because │−2.0│< 2.052

C) No, because │−2.0│< 2.045

Question #134 - 136 of 195 Question ID: 1208346

Which of the following statements best describes the explanatory power of the estimated regression?

A) The large F statistic indicates that both independent variables help explain changes in housing
starts.

B) The independent variables explain 61.58% of the variation in housing starts.

C) The residual standard error of only 0.3 indicates that the regression equation is a good t for the
sample data

Question #135 - 136 of 195 Question ID: 1208347

The estimated standard deviation of housing starts (in millions) is closest to:

A) 0.3

B) 0.47

C) 0.22

Question #136 - 136 of 195 Question ID: 1208348

Which of the following is the least appropriate statement in relation to R-square and adjusted R-square:
A) R-square typically increases when new independent variables are added to the regression
regardless of their explanatory power

B) Adjusted R-square is a value between 0 and 1 and can be interpreted as a percentage

C) Adjusted R-square decreases when the added independent variable adds little value to the
regression model

Question #137 of 195 Question ID: 1208262

Consider the following estimated regression equation, with calculated t-statistics of the estimates as
indicated:

AUTOt = 10.0 + 1.25 PIt + 1.0 TEENt – 2.0 INSt

with a PI calculated t-statstic of 0.45, a TEEN calculated t-statstic of 2.2, and an INS calculated t-

statstic of 0.63.

The equation was estimated over 40 companies. Using a 5% level of signi cance, which of the independent
variables signi cantly di erent from zero?

A) PI only.

B) PI and INS only.

C) TEEN only.

Damon Washburn, CFA, is currently enrolled as a part-time graduate student at State University. One of
his recent assignments for his course on Quantitative Analysis is to perform a regression analysis utilizing
the concepts covered during the semester. He must interpret the results of the regression as well as the

test statistics. Washburn is con dent in his ability to calculate the statistics because the class is allowed to
use statistical software. However, he realizes that the interpretation of the statistics will be the true test of

his knowledge of regression analysis. His professor has given to the students a list of questions that must
be answered by the results of the analysis.

Washburn has estimated a regression equation in which 160 quarterly returns on the S&P 500 are
explained by three macroeconomic variables: employment growth (EMP) as measured by nonfarm

payrolls, gross domestic product (GDP) growth, and private investment (INV). The results of the regression
analysis are as follows:

Coe cient Estimates

Standard Error
Parameter Coe cient
of Coe cient

Intercept 9.50 3.40

EMP -4.50 1.25

GDP 4.20 0.76

INV -0.30 0.16

Other Data:

Regression sum of squares (RSS) = 126.00

Sum of squared errors (SSE) = 267.00

Durbin-Watson statistic (DW) = 1.34

Abbreviated Table of the Student's t-distribution (One-Tailed Probabilities)

df p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005

3 1.638 2.353 3.182 4.541 5.841

10 1.372 1.812 2.228 2.764 3.169

50 1.299 1.676 2.009 2.403 2.678

100 1.290 1.660 1.984 2.364 2.626

120 1.289 1.658 1.980 2.358 2.617

200 1.286 1.653 1.972 2.345 2.601

Critical Values for Durbin-Watson Statistic (α = 0.05)

K=1 K=2 K=3 K=4 K=5

n dl du dl du dl du dl du dl du

20 1.20 1.41 1.10 1.54 1.00 1.68 0.90 1.83 0.79 1.99

50 1.50 1.59 1.46 1.63 1.42 1.67 1.38 1.72 1.34 1.77

>100 1.65 1.69 1.63 1.72 1.61 1.74 1.59 1.76 1.57 1.78

Question #138 - 143 of 195 Question ID: 1208288

How many of the three independent variables (not including the intercept term) are statistically signi cant
in explaining quarterly stock returns at the 5.0% level?

A) One of the three is statistically signi cant.

B) All three are statistically signi cant.

C) Two of the three are statistically signi cant.

Question #139 - 143 of 195 Question ID: 1208289

Can the null hypothesis that the GDP growth coe cient is equal to 3.50 be rejected at the 1.0% con dence

level versus the alternative that it is not equal to 3.50? The null hypothesis is:

A) rejected because the t-statistic is less than 2.617.

B) accepted because the t-statistic is less than 2.617.

C) not rejected because the t-statistic is equal to 0.92.

Question #140 - 143 of 195 Question ID: 1208290

The percentage of the total variation in quarterly stock returns explained by the independent variables is

closest to:

A) 47%.

B) 32%.

C) 42%.

Question #141 - 143 of 195 Question ID: 1208291

According to the Durbin-Watson statistic, there is:

A) no signi cant positive serial correlation in the residuals.

B) signi cant positive serial correlation in the residuals.

C) signi cant heteroskedasticity in the residuals.

Question #142 - 143 of 195 Question ID: 1208292

What is the predicted quarterly stock return, given the following forecasts?

Employment growth = 2.0%

GDP growth = 1.0%

Private investment growth = -1.0%

A) 4.7%.

B) 4.4%.

C) 5.0%.

Question #143 - 143 of 195 Question ID: 1208293

What is the standard error of the estimate?

A) 1.71.

B) 0.81.

C) 1.31.
Question #144 of 195 Question ID: 1208358

Which of the following statements about the F-statistic is least accurate?

A) F = MSR/MSE.

B) dfnumerator = k and dfdenominator = n − k − 1.

C) Rejecting the null hypothesis means that only one of the independent variables is statistically
signi cant.

Question #145 of 195 Question ID: 1208464

When two or more of the independent variables in a multiple regression are correlated with each other,
the condition is called:

A) serial correlation.

B) multicollinearity.

C) conditional heteroskedasticity.

Question #146 of 195 Question ID: 1208327

An analyst is investigating the hypothesis that the beta of a fund is equal to one. The analyst takes 60

monthly returns for the fund and regresses them against the Wilshire 5000. The test statistic is 1.97 and
the p-value is 0.05. Which of the following is CORRECT?

A) The proportion of occurrences when the absolute value of the test statistic will be higher when
beta is equal to 1 than when beta is not equal to 1 is less than or equal to 5%.

B) If beta is equal to 1, the likelihood that the absolute value of the test statistic is equal to 1.97 is less
than or equal to 5%.

C) If beta is equal to 1, the likelihood that the absolute value of the test statistic would be greater
than or equal to 1.97 is 5%.

Question #147 of 195 Question ID: 1208473

When utilizing a proxy for one or more independent variables in a multiple regression model, which of the

following errors is most likely to occur?

A) Heteroskedasticity.

B) Multicollinearity.

C) Model misspeci cation.

Question #148 of 195 Question ID: 1208389

Suppose the analyst wants to add a dummy variable for whether a person has an undergraduate college

degree and a graduate degree. What is the CORRECT representation if a person has both degrees?

Undergraduate Graduate
Degree Degree
Dummy Dummy
Variable Variable

A) 0 0

B) 0 1

C) 1 1

Question #149 of 195 Question ID: 1208331

Consider the following estimated regression equation, with standard errors of the coe cients as

indicated:

Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi − 2.0 COMPi + 8.0 CAPi

where the standard error for R&D is 0.45, the standard error for ADV is 2.2, the standard error

for COMP 0.63, and the standard error for CAP is 2.5.

Sales are in millions of dollars. An analyst is given the following predictions on the independent variables:
R&D = 5, ADV = 4, COMP = 10, and CAP = 40.

The predicted level of sales is closest to:

A) $310.25 million.

B) $300.25 million.

C) $320.25 million.

In preparing an analysis of HB Inc., Jack Stumper is asked to look at the company's sales in relation to
broad based economic indicators. Stumper's analysis indicates that HB's monthly sales are related to

changes in housing starts (H) and changes in the mortgage interest rate (M). The analysis covers the past
ten years for these variables. The regression equation is:
 S = 1.76 + 0.23H - 0.08M

Number of
123
observations:

Unadjusted R2: 0.77

F statistic: 9.80

Durbin Watson statistic 0.50

p-value of Housing
0.017
Starts

t-stat of Mortgage
-2.6
Rates

Variable Descriptions

S = HB Sales (in thousands)

H = housing starts (in thousands)

M = mortgage interest rate (in percent)

November 20x6 Actual Data

HB's monthly sales: $55,000

Housing starts: 150,000

Mortgage interest rate (%): 7.5

Critical Values for Student's t-Distribution

Level of signi cance for one-tailed test

Degrees of 10% 5% 2.5% 1% 0.5% 0.05%

Freedom Level of signi cance for two-tailed test

20% 10% 5% 2% 1% 0.1%

10 1.372 1.812 2.228 2.764 3.169 4.587

20 1.325 1.725 2.086 2.528 2.845 3.850

30 1.310 1.697 2.042 2.457 2.750 3.646

40 1.303 1.684 2.021 2.423 2.704 3.551

120 1.289 1.658 1.980 2.358 2.617 3.373

Question #150 - 155 of 195 Question ID: 1208309

Using the regression model developed, the closest prediction of sales for December 20x6 is:

A) $55,000

B) $36,000

C) $44,000
Question #151 - 155 of 195 Question ID: 1208310

Will Stumper conclude that the housing starts coe cient is statistically di erent from zero and how will he

interpret it at the 5% signi cance level:

A) not di erent from zero; sales will rise by $0 for every 100 house starts

B) di erent from zero; sales will rise by $100 for every 23 house starts

C) di erent from zero; sales will rise by $23 for every 100 house starts

Question #152 - 155 of 195 Question ID: 1208311

Is the regression coe cient of changes in mortgage interest rates di erent from zero at the 5 percent
level of signi cance?

A) no, because 2.6 < 2.62

B) yes, because 2.6 > 2.23

C) yes, because 2.6 > 1.98

Question #153 - 155 of 195 Question ID: 1208312

In this multiple regression, the F-statistic indicates the:

A) degree of correlation between the independent variables

B) the joint signi cance of the independent variables

C) deviation of the estimated values from the actual values of the dependent variable

Question #154 - 155 of 195 Question ID: 1208313

The regression statistics above indicate that for the period under study, the independent variables
(housing starts, mortgage interest rate) together explained approximately what percentage of the
variation in the dependent variable (sales)?

A) 67.00

B) 77.00

C) 9.80
Question #155 - 155 of 195 Question ID: 1208314

In this multiple regression, if Stumper discovers that the residuals exhibit positive serial correlation, the

most likely e ect is?

A) standard errors are not a ected but coe cient estimate is inconsistent.

B) standard errors are too high but coe cient estimate is consistent.

C) standard errors are too low but coe cient estimate is consistent.

Question #156 of 195 Question ID: 1208414

Which of the following is least accurate regarding the Durbin-Watson (DW) test statistic?

A) If the residuals have positive serial correlation, the DW statistic will be less than 2.

B) If the residuals have positive serial correlation, the DW statistic will be greater than 2.

C) In tests of serial correlation using the DW statistic, there is a rejection region, a region over which
the test can fail to reject the null, and an inconclusive region.

Question #157 of 195 Question ID: 1208382

Which of the following statements regarding the R2 is least accurate?

A) It is possible for the adjusted-R2 to decline as more variables are added to the multiple regression.

B) The adjusted-R2 not appropriate to use in simple regression.

C) The adjusted-R2 is greater than the R2 in multiple regression.

Question #158 of 195 Question ID: 1208362

Wilson estimated a regression that produced the following analysis of variance (ANOVA) table:

Source Sum of squares Degrees of freedom Mean square

Regression 100 1 100.0

Error 300 40 7.5

Total 400 41

The values of R2 and the F-statistic for the t of the model are:

A) R2 = 0.25 and F = 0.930.

B) R2 = 0.20 and F = 13.333.

C) R2 = 0.25 and F = 13.333.

Question #159 of 195 Question ID: 1208363

Which of the following statements regarding the analysis of variance (ANOVA) table is least accurate? The:

A) F-statistic is the ratio of the mean square regression to the mean square error.

B) F-statistic cannot be computed with the data o ered in the ANOVA table.

C) standard error of the estimate is the square root of the mean square error.

Question #160 of 195 Question ID: 1208329

Test the statistical signi cance of the independent variable change in oil prices (OIL) on quarterly EPS of SG
Inc. (dependent variable). The results of the regression are shown below.

Coe cient Coe cient Value Standard error

Intercept 2.02 1.65

OIL −0.25 0.18

Number of observations = 45

A) The slope coe cient is statistically signi cant at 10% level of signi cance but not at 5% level of
signi cance.

B) The slope coe cient is not statistically signi cant at 10% level of signi cance.

C) The slope coe cient is statistically signi cant at 5% level of signi cance.
Question #161 of 195 Question ID: 1208391

The amount of the State of Florida's total revenue that is allocated to the education budget is believed to

be dependent upon the total revenue for the year and the political party that controls the state legislature.
Which of the following regression models is most appropriate for capturing the e ect of the political party

on the education budget? Assume Yt is the amount of the education budget for Florida in year t, X is

Florida's total revenue in year t, and Dt = {1 if the legislature has a Democratic majority in year t, 0

otherwise}.

A) Yt = b0 + b1Dt + et.

B) Yt = b0 + b1Dt + b2Xt + et.

C) Yt = b1Dt + b2Xt + et.

Question #162 of 195 Question ID: 1208461

Which of the following statements regarding multicollinearity is least accurate?

A) Multicollinearity may be present in any regression model.

B) If the t-statistics for the individual independent variables are insigni cant, yet the F-statistic is
signi cant, this indicates the presence of multicollinearity.

C) Multicollinearity may be a problem even if the multicollinearity is not perfect.

Question #163 of 195 Question ID: 1208477

An analyst is building a regression model which returns a qualitative dependant variable based on a
probability distribution. This is least likely a:

A) discriminant model.

B) logit model.

C) probit model.

Question #164 of 195 Question ID: 1208384

A fund has changed managers twice during the past 10 years. An analyst wishes to measure whether

either of the changes in managers has had an impact on performance. The analyst wishes to
simultaneously measure the impact of risk on the fund's return. R is the return on the fund, and M is the
return on a market index. Which of the following regression equations can appropriately measure the

desired impacts?
A) The desired impact cannot be measured.

B) R = a + bM + c1D1 + c2D2 + ε, where D1 = 1 if the return is from the rst manager, and D2 = 1 if the

return is from the third manager.

C) R = a + bM + c1D1 + c2D2 + c3D3 + ε, where D1 = 1 if the return is from the rst manager, and D2 =

1 if the return is from the second manager, and D3 = 1 is the return is from the third manager.

Question #165 of 195 Question ID: 1208463

An analyst further studies the independent variables of a study she recently completed. The correlation
matrix shown below is the result. Which statement best re ects possible problems with a multivariate

regression?

Age Education Experience Income

Age 1.00

Education 0.50 1.00

Experience 0.95 0.55 1.00

Income 0.60 0.65 0.89 1.00

A) Education may be unnecessary.

B) Experience may be a redundant variable.

C) Age should be excluded from the regression.

Dave Turner is a security analyst who is using regression analysis to determine how well two factors

explain returns for common stocks. The independent variables are the natural logarithm of the number of
analysts following the companies, Ln(no. of analysts), and the natural logarithm of the market value of the
companies, Ln(market value). The regression output generated from a statistical program is given in the

following tables. Each p-value corresponds to a two-tail test.

Turner plans to use the result in the analysis of two investments. WLK Corp. has twelve analysts following
it and a market capitalization of $2.33 billion. NGR Corp. has two analysts following it and a market

capitalization of $47 million.

Table 1: Regression Output

Standard Error of
Variable Coe cient t-statistic p-value
the Coe cient

Intercept 0.043 0.01159 3.71 < 0.001

Ln(No. of
−0.027 0.00466 −5.80 < 0.001
Analysts)

Ln(Market Value) 0.006 0.00271 2.21 0.028

Table 2: ANOVA

Degrees of Freedom Sum of Squares Mean Square

Regression 2 0.103 0.051

Residual 194 0.559 0.003

Total 196 0.662

Question #166 - 171 of 195 Question ID: 1208280

In a one-sided test and a 1% level of signi cance, which of the following coe cients is signi cantly
di erent from zero?

A) The intercept and the coe cient on ln(no. of analysts) only.

B) The coe cient on ln(no. of Analysts) only.

C) The intercept and the coe cient on ln(market value) only.

Question #167 - 171 of 195 Question ID: 1208281

The 95% con dence interval (use a t-stat of 1.96 for this question only) of the estimated coe cient for the

independant variable Ln(Market Value) is closest to:

A) 0.011 to 0.001

B) 0.014 to -0.009

C) -0.018 to -0.036

Question #168 - 171 of 195 Question ID: 1208282

If the number of analysts on NGR Corp. were to double to 4, the change in the forecast of NGR would be
closest to?

A) −0.019.

B) −0.035.

C) −0.055.

Question #169 - 171 of 195 Question ID: 1208283

Based on a R2 calculated from the information in Table 2, the analyst should conclude that the number of
analysts and ln(market value) of the rm explain:

A) 84.4% of the variation in returns.

B) 18.4% of the variation in returns.

C) 15.6% of the variation in returns.

Question #170 - 171 of 195 Question ID: 1208284

What is the F-statistic from the regression? And, what can be concluded from its value at a 1% level of

signi cance?

A) F = 17.00, reject a hypothesis that both of the slope coe cients are equal to zero.

B) F = 1.97, fail to reject a hypothesis that both of the slope coe cients are equal to zero.

C) F = 5.80, reject a hypothesis that both of the slope coe cients are equal to zero.

Question #171 - 171 of 195 Question ID: 1208285

Upon further analysis, Turner concludes that multicollinearity is a problem. What might have prompted

this further analysis and what is intuition behind the conclusion?

A) At least one of the t-statistics was not signi cant, the F-statistic was signi cant, and a positive
relationship between the number of analysts and the size of the rm would be expected.

B) At least one of the t-statistics was not signi cant, the F-statistic was signi cant, and an intercept
not signi cantly di erent from zero would be expected.

C) At least one of the t-statistics was not signi cant, the F-statistic was not signi cant, and a positive
relationship between the number of analysts and the size of the rm would be expected.

Question #172 of 195 Question ID: 1208276

Which of the following statements most accurately interprets the following regression results at the given
signi cance level?

Variable p-value

Intercept 0.0201

X1 0.0284

X2 0.0310

X3 0.0143

A) The variable X2 is statistically signi cantly di erent from zero at the 3% signi cance level.

B) The variables X1 and X2 are statistically signi cantly di erent from zero at the 2% signi cance
level.

C) The variable X3 is statistically signi cantly di erent from zero at the 2% signi cance level.

Question #173 of 195 Question ID: 1208413

Which of the following conditions will least likely a ect the statistical inference about regression
parameters by itself?

A) Unconditional heteroskedasticity.

B) Multicollinearity.

C) Conditional heteroskedasticity.

Question #174 of 195 Question ID: 1208263

Consider the following estimated regression equation, with the standard errors of the slope coe cients as

noted:

Salesi = 10.0 + 1.25 R&Di + 1.0 ADVi – 2.0 COMPi + 8.0 CAPi

where the standard error for the estimated coe cient on R&D is 0.45, the standard error for the
estimated coe cient on ADV is 2.2 , the standard error for the estimated coe cient on COMP is

0.63, and the standard error for the estimated coe cient on CAP is 2.5.

The equation was estimated over 40 companies. Using a 5% level of signi cance, which of the estimated
coe cients are signi cantly di erent from zero?

A) R&D, COMP, and CAP only.

B) R&D, ADV, COMP, and CAP.

C) ADV and CAP only.

Question #175 of 195 Question ID: 1208409

Which of the following statements regarding heteroskedasticity is least accurate?

A) The presence of heteroskedastic error terms results in a variance of the residuals that is too large.

B) Heteroskedasticity only occurs in cross-sectional regressions.

C) Multicollinearity is a potential problem only in multiple regressions, not simple regressions.

Question #176 of 195 Question ID: 1208450

During the course of a multiple regression analysis, an analyst has observed several items that she
believes may render incorrect conclusions. For example, the coe cient standard errors are too small,

although the estimated coe cients are accurate. She believes that these small standard error terms will
result in the computed t-statistics being too big, resulting in too many Type I errors. The analyst has most
likely observed which of the following assumption violations in her regression analysis?

A) Positive serial correlation.

B) Multicollinearity.

C) Homoskedasticity.

Question #177 of 195 Question ID: 1208360

An analyst runs a regression of monthly value-stock returns on ve independent variables over 48 months.
The total sum of squares is 430, and the sum of squared errors is 170. Test the null hypothesis at the 2.5%

and 5% signi cance level that all ve of the independent variables are equal to zero.

A) Rejected at 2.5% signi cance and 5% signi cance.

B) Rejected at 5% signi cance only.

C) Not rejected at 2.5% or 5.0% signi cance.

Question #178 of 195 Question ID: 1208482

An analyst has run several regressions hoping to predict stock returns, and wants to translate this into an
economic interpretation for his clients.

Return = 0.03 + 0.020Beta – 0.0001MarketCap (in billions) + ε

A correct interpretation of the regression most likely includes:

A) a stock with zero beta and zero market capitalization will return precisely 3.0%.

B) a billion dollar increase in market capitalization will drive returns down by 0.01%.

C) prediction errors are always on the positive side.

Question #179 of 195 Question ID: 1208387

An analyst wishes to test whether the stock returns of two portfolio managers provide di erent average
returns. The analyst believes that the portfolio managers' returns are related to other factors as well.
Which of the following can provide a suitable test?

A) Dummy variable regression.

B) Di erence of means.

C) Paired-comparisons.

Raul Gloucester, CFA, is analyzing the returns of a fund that his company o ers. He tests the fund's
sensitivity to a small capitalization index and a large capitalization index, as well as to whether the January

e ect plays a role in the fund's performance. He uses two years of monthly returns data, and runs a
regression of the fund's return on the indexes and a January-e ect qualitative variable. The "January"
variable is 1 for the month of January and zero for all other months. The results of the regression are

shown in the tables below.

Regression Statistics

Multiple R 0.817088

R2 0.667632

Adjusted R2 0.617777

Standard Error 1.655891

Observations 24

ANOVA

df SS MS

Regression 3 110.1568 36.71895

Residual 20 54.8395 2.741975

Total 23 164.9963
 Coe cients Standard Error t-Statistic

Intercept -0.23821 0.388717 -0.61282

January 2.560552 1.232634 2.077301

Small Cap Index 0.231349 0.123007 1.880778

Large Cap Index 0.951515 0.254528 3.738359

Gloucester will perform an F-test for the equation. He also plans to test for serial correlation and
conditional and unconditional heteroskedasticity.

Jason Brown, CFA, is interested in Gloucester's results. He speculates that they are economically signi cant
in that excess returns could be earned by shorting the large capitalization and the small capitalization
indexes in the month of January and using the proceeds to buy the fund.

Question #180 - 185 of 195 Question ID: 1208393

The percent of the variation in the fund's return that is explained by the regression is:

A) 66.76%.

B) 61.78%.

C) 81.71%.

Question #181 - 185 of 195 Question ID: 1208394

In a two-tailed test at a ve percent level of signi cance, the coe cients that are signi cant are:

A) the large cap index only.

B) the January e ect and the large capitalization index only.

C) the January e ect and the small capitalization index only.

Question #182 - 185 of 195 Question ID: 1208395

Which of the following best summarizes the results of an F-test (5 percent signi cance) for the regression?

The F-statistic is:

A) 9.05 and the critical value is 3.86.

B) 13.39 and the critical value is 3.86.

C) 13.39 and the critical value is 3.10.

Question #183 - 185 of 195 Question ID: 1208396

The best test for unconditional heteroskedasticity is:

A) the Durbin-Watson test only.

B) the Breusch-Pagan test only.

C) neither the Durbin-Watson test nor the Breusch-Pagan test.

Question #184 - 185 of 195 Question ID: 1208397

In the month of January, if both the small and large capitalization index have a zero return, we would
expect the fund to have a return equal to:

A) 2.322.

B) 2.799.

C) 2.561.

Question #185 - 185 of 195 Question ID: 1208398

Assuming (for this question only) that the F-test was signi cant but that the t-tests of the independent
variables were insigni cant, this would most likely suggest:

A) serial correlation.

B) conditional heteroskedasticity.

C) multicollinearity.

Lynn Carter, CFA, is an analyst in the research department for Smith Brothers in New York. She follows
several industries, as well as the top companies in each industry. She provides research materials for both

the equity traders for Smith Brothers as well as their retail customers. She routinely performs regression
analysis on those companies that she follows to identify any emerging trends that could a ect investment
decisions.

Due to recent layo s at the company, there has been some consolidation in the research department. Two

research analysts have been laid o , and their workload will now be distributed among the remaining four
analysts. In addition to her current workload, Carter will now be responsible for providing research on the

airline industry. Pinnacle Airlines, a leader in the industry, represents a large holding in Smith Brothers'
portfolio. Looking back over past research on Pinnacle, Carter recognizes that the company historically has
been a strong performer in what is considered to be a very competitive industry. The stock price over the

last 52-week period has outperformed that of other industry leaders, although Pinnacle's net income has
remained at. Carter wonders if the stock price of Pinnacle has become overvalued relative to its peer
group in the market, and wants to determine if the timing is right for Smith Brothers to decrease its
position in Pinnacle.

Carter decides to run a regression analysis, using the monthly returns of Pinnacle stock as the dependent

variable and monthly returns of the airlines industry as the independent variable.

Analysis of Variance Table (ANOVA)

df
SS
Mean Square
Source
(Degrees of (SS/df)
(Sum of Squares)
Freedom)

Regression 1 3,257 (RSS) 3,257 (MSR)

Error 8 298 (SSE) 37.25 (MSE)

Total 9 3,555 (SS Total)

Question #186 - 191 of 195 Question ID: 1208367

Which of the following is least likely to be an assumption regarding linear regression?

A) A linear relationship exists between the dependent and independent variables.

B) The variance of the residuals is constant.

C) The independent variable is correlated with the residuals.

Question #187 - 191 of 195 Question ID: 1208368

Carter wants to test the strength of the relationship between the two variables. She calculates a

correlation coe cient of 0.72. This means that the two variables:

A) have a positive but non-linear relationship.

B) have no relationship.

C) have a positive linear association.

Question #188 - 191 of 195 Question ID: 1208369

Based upon the information presented in the ANOVA table, what is the standard error of the estimate?

A) 57.07.

B) 37.25.

C) 6.10.
Question #189 - 191 of 195 Question ID: 1208370

Based upon the information presented in the ANOVA table, what is the coe cient of determination?

A) 0.839, indicating that company returns explain about 83.9% of the variability of industry returns.

B) 0.084, indicating that the variability of industry returns explains about 8.4% of the variability of
company returns.

C) 0.916, indicating that the variability of industry returns explains about 91.6% of the variability of
company returns.

Question #190 - 191 of 195 Question ID: 1208371

Based upon her analysis, Carter has derived the following regression equation: Ŷ = 1.75 + 3.25X1. The

predicted value of the Y variable equals 50.50, if the:

A) coe cient of the determination equals 15.

B) predicted value of the dependent variable equals 15.

C) predicted value of the independent variable equals 15.

Question #191 - 191 of 195 Question ID: 1208372

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: Data derived from regression analysis may be homoskedastic.

Point 2: Data from regression relationships tends to exhibit parameter instability.

Point 3: Results of regression analysis may exhibit autocorrelation.
Point 4: The variance of the error term may change over time.

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?

A) Points 2, 3, and 4.

B) Points 1, 2, and 3.

C) Points 1, 3, and 4.
Question #192 of 195 Question ID: 1208460

A variable is regressed against three other variables, x, y, and z. Which of the following would NOT be an

indication of multicollinearity? X is closely related to:

A) y2.

B) 3y + 2z.

C) 9y - 4z + 3

Question #193 of 195 Question ID: 1208322

Seventy-two monthly stock returns for a fund between 2007 and 2012 are regressed against the market
return, measured by the Wilshire 5000, and two dummy variables. The fund changed managers on January
2, 2010. Dummy variable one is equal to 1 if the return is from a month between 2010 and 2012. Dummy

variable number two is equal to 1 if the return is from the second half of the year. There are 36
observations when dummy variable one equals 0, half of which are when dummy variable two also equals
0. The following are the estimated coe cient values and standard errors of the coe cients.

Coe cient Value Standard error

Market 1.43000 0.319000

Dummy 1 0.00162 0.000675

Dummy 2 −0.00132 0.000733

What is the p-value for a test of the hypothesis that the new manager outperformed the old manager?

A) Between 0.05 and 0.10.

B) Lower than 0.01.

C) Between 0.01 and 0.05.

Question #194 of 195 Question ID: 1208390

An analyst is trying to determine whether fund return performance is persistent. The analyst divides funds

into three groups based on whether their return performance was in the top third (group 1), middle third
(group 2), or bottom third (group 3) during the previous year. The manager then creates the following

equation: R = a + b1D1 + b2D2 + b3D3 + ε, where R is return premium on the fund (the return minus the

return on the S&P 500 benchmark) and Di is equal to 1 if the fund is in group i. Assuming no other

information, this equation will su er from:

A) heteroskedasticity.

B) serial correlation.
C) multicollinearity.

Question #195 of 195 Question ID: 1208451

Which of the following statements regarding serial correlation that might be encountered in regression
analysis is least accurate?

A) Serial correlation occurs least often with time series data.

B) Positive serial correlation and heteroskedasticity can both lead to Type I errors.

C) Serial correlation does not a ect consistency of regression coe cients.