Reading 11- LOS B : Q3 all, identified, calendar, factors

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3.Ron James, CFA, computed the correlation coefficient for historical oil prices and the occurrence of a leap year and has identified a statistically significant relationship. Specifically, the price of oil declined every fourth calendar year, all other factors held constant. James has most likely identified which of the following conditions in correlation analysis?

A)   Positive correlation.

B)   Spurious correlation.

C)   Nonlinear correlation.

D)   Outliers.

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The correct answer was B)

Spurious correlation occurs when the analysis erroneously indicates a linear relationship between two variables when none exists. There is no economic explanation for this relationship; therefore this would be classified as spurious correlation.