Reading 12- LOS j: Q1-4 class, difference, represents, between

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1.What is the main difference 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)    A typical dummy variable model is based on the normal distribution, while a probit model is based on the lognormal distribution.
C)    Dummy variable regressions attempt to create an equation to classify items into one of two categories, while probit models estimate a probability.
D)    There is no difference--a probit model is simply a special case of a dummy variable regression.

2．A high-yield bond analyst is trying to develop an equation using financial ratios to estimate the probability of a company defaulting on its bonds. Since the analyst is using data over different 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)    dummy variable regression.
C)    discriminant analysis.
D)    logit modeling.

3．Which of the following is NOT a model that has a qualitative dependent variable?
A)    Logit.
B)    Probit.
C)    Event study.
D)    Discriminant analysis.

4.Which of the following statements is NOT an example of a qualitative dependent variable? The:
A)    probability of bankruptcy is explained by several company-specific financial ratios.
B)    likelihood of being acquired is explained by several company-specific financial ratios and economic variables.
C)    likelihood that a company will divest itself of a subsidiary, explained by subsidiary and competition variables.
D)    number of shares acquired through the exercise of executive stock options, explained by executive-specific and company-specific variables.

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1.What is the main difference 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)    A typical dummy variable model is based on the normal distribution, while a probit model is based on the lognormal distribution.
C)    Dummy variable regressions attempt to create an equation to classify items into one of two categories, while probit models estimate a probability.
D)    There is no difference--a probit model is simply a special case of a dummy variable regression.
The correct answer was A)
Dummy variables are used to represent a qualitative independent variable. Probit models are used to estimate the probability of occurrence for a qualitative dependent variable.

2．A high-yield bond analyst is trying to develop an equation using financial ratios to estimate the probability of a company defaulting on its bonds. Since the analyst is using data over different 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)    dummy variable regression.
C)    discriminant analysis.
D)    logit modeling.
The correct answer was D)
The only one of the possible answers that estimates a probability of a discrete outcome is logit modeling.

3．Which of the following is NOT a model that has a qualitative dependent variable?
A)    Logit.
B)    Probit.
C)    Event study.
D)    Discriminant analysis.
The correct answer was C)
An event study is the estimation of the abnormal returns--generally associated with an informational event—that take on quantitative values.

4.Which of the following statements is NOT an example of a qualitative dependent variable? The:
A)    probability of bankruptcy is explained by several company-specific financial ratios.
B)    likelihood of being acquired is explained by several company-specific financial ratios and economic variables.
C)    likelihood that a company will divest itself of a subsidiary, explained by subsidiary and competition variables.
D)    number of shares acquired through the exercise of executive stock options, explained by executive-specific and company-specific variables.
The correct answer was D)
The number of shares is a continuous variable and is, therefore, not considered a qualitative dependent variable.