HuskyGrad2010

Bea Carroll, CFA, has performed a regression analysis of the relationship between 6-month LIBOR and the U.S. Consumer Price Index (CPI). Her analysis indicates a standard error of estimate (SEE) that is high relative to total variability. Which of the following conclusions regarding the relationship between 6-month LIBOR and CPI can Carroll most accurately draw from her SEE analysis? The relationship between the two variables is:

A) positively correlated.

B) very strong.

C) very weak.

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The SEE is the standard deviation of the error terms in the regression, and is an indicator of the strength of the relationship between the dependent and independent variables. The SEE will be low if the relationship is strong and conversely will be high if the relationship is weak.

HuskyGrad2010

The most appropriate measure of the degree of variability of the actual Y-values relative to the estimated Y-values from a regression equation is the:

A) standard error of the estimate (SEE).

B) sum of squared errors (SSE).

C) coefficient of determination (R2).

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The SEE is the standard deviation of the error terms in the regression, and is an indicator of the strength of the relationship between the dependent and independent variables. The SEE will be low if the relationship is strong, and conversely will be high if the relationship is weak.

HuskyGrad2010

Which of the following statements about the standard error of estimate is least accurate? The standard error of estimate:

A) is the square of the coefficient of determination.

B) is the square root of the sum of the squared deviations from the regression line divided by (n − 2).

C) measures the Y variable's variability that is not explained by the regression equation.

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Note: The coefficient of determination (R2) is the square of the correlation coefficient in simple linear regression.

HuskyGrad2010

A regression between the returns on a stock and its industry index returns gives the following results:

	Coefficient	Standard Error	t-value
Intercept	2.1	2.01	1.04
Industry Index	1.9	0.31	6.13

• The t-statistic critical value at the 0.01 level of significance is 2.58
• Standard error of estimate = 15.1
• Correlation coefficient = 0.849

The regression statistics presented indicate that the dispersion of stock returns about the regression line is:

A) 72.10.

B) 15.10.

C) 63.20.

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The standard deviation of the differences between the actual observations and the projection of those observations (the regression line) is called the standard error of the estimate. The standard error of the estimate is the unsystematic risk.

HuskyGrad2010

The standard error of estimate is closest to the:

A) standard deviation of the independent variable.

B) standard deviation of the residuals.

C) standard deviation of the dependent variable.

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The standard error of the estimate measures the uncertainty in the relationship between the actual and predicted values of the dependent variable. The differences between these values are called the residuals, and the standard error of the estimate helps gauge the fit of the regression line (the smaller the standard error of the estimate, the better the fit).

HuskyGrad2010

The standard error of the estimate measures the variability of the:

A) actual dependent variable values about the estimated regression line.

B) predicted y-values around the mean of the observed y-values.

C) values of the sample regression coefficient.

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The standard error of the estimate (SEE) measures the uncertainty in the relationship between the independent and dependent variables and helps gauge the fit of the regression line (the smaller the standard error of the estimate, the better the fit).

Remember that the SEE is different from the sum of squared errors (SSE). SSE = the sum of (actual value - predicted value)2. SEE is the the square root of the SSE "standardized" by the degrees of freedom, or SEE = [SSE / (n - 2)]1/2

HuskyGrad2010

Jason Brock, CFA, is performing a regression analysis to identify and evaluate any relationship between the common stock of ABT Corp and the S&P 100 index. He utilizes monthly data from the past five years, and assumes that the sum of the squared errors is .0039. The calculated standard error of the estimate (SEE) is closest to:

A) 0.0082.

B) 0.0080.

C) 0.0360.

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The standard error of estimate of a regression equation measures the degree of variability between the actual and estimated Y-values. The SEE may also be referred to as the standard error of the residual or the standard error of the regression. The SEE is equal to the square root of the mean squared error. Expressed in a formula,
SEE = √(SSE / (n-2)) = √(.0039 / (60-2)) = .0082

HuskyGrad2010

The standard error of the estimate in a regression is the standard deviation of the:

A) differences between the actual values of the dependent variable and the mean of the dependent variable.

B) residuals of the regression.

C) dependent variable.

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The standard error is se = √[SSE/(n-2)]. It is the standard deviation of the residuals.

HuskyGrad2010

Which of the following statements about the standard error of the estimate (SEE) is least accurate?

A) The SEE will be high if the relationship between the independent and dependent variables is weak.

B) The SEE may be calculated from the sum of the squared errors and the number of observations.

C) The larger the SEE the larger the R2.

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The R2, or coefficient of determination, is the percentage of variation in the dependent variable explained by the variation in the independent variable. A higher R2 means a better fit. The SEE is smaller when the fit is better.

HuskyGrad2010

If X and Y are perfectly correlated, regressing Y onto X will result in which of the following:

A) the standard error of estimate will be zero.

B) the regression line will be sloped upward.

C) the alpha coefficient will be zero.

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If X and Y are perfectly correlated, all of the points will plot on the regression line, so the standard error of the estimate will be zero. Note that the sign of the correlation coefficient will indicate which way the regression line is pointing (there can be perfect negative correlation sloping downward as well as perfect positive correlation sloping upward). Alpha is the intercept and is not directly related to the correlation.