Reading 12: Multiple Regression and Issues in Regression A

management, believes, class, restaurant, revenue

Q1. 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 differs by month?

A) 13.

B) 12.

C) 11.

Q2. 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) R = a + bM + c₁D₁ + c₂D₂ + c₃D₃ + ε, where D₁ = 1 if the return is from the first manager, and D₂ = 1 if the return is from the second manager, and D₃ = 1 is the return is from the third manager.

B) The desired impact cannot be measured.

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

Q3. 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) one dummy variables.

B) three dummy variables.

C) four dummy variables.

Q4. Consider the following model of earnings (EPS) regressed against dummy variables for the quarters:

EPS_t = α + β₁Q_1t + β₂Q_2t + β₃Q_3t

where:
EPS_t is a quarterly observation of earnings per share
Q_1t takes on a value of 1 if period t is the second quarter, 0 otherwise
Q_2t takes on a value of 1 if period t is the third quarter, 0 otherwise
Q_3t 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) EPS for the first quarter is represented by the residual.

B) significance of the coefficients cannot be interpreted in the case of dummy variables.

C) coefficient on each dummy tells us about the difference in earnings per share between the respective quarter and the one left out (first quarter in this case).

Q5. An analyst wishes to test whether the stock returns of two portfolio managers provide different 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) Paired-comparisons.

C) Difference of means.