Reading 11: Correlation and Regression-LOS j 习题精选 2011, following, include, number

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Session 3: Quantitative Methods for Valuation
Reading 11: Correlation and Regression

LOS j: Discuss the limitations of regression analysis.

 

 

Regression analysis has a number of assumptions. Violations of these assumptions include which of the following?

A) Independent variables that are not normally distributed.

B) Residuals that are not normally distributed.

C) A zero mean of the residuals.

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The assumptions include a normally distributed residual with a constant variance and a mean of zero.

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Limitations of regression analysis include all of the following EXCEPT:

A) parameter instability.

B) outliers may affect the estimated regression line.

C) regression results do not indicate anything about economic significance.

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The estimated coefficients tell us something about economic significance – they tell us the expected or average change in the dependent variable for a given change in the independent variable.

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Wanda Brunner, CFA, is working on a regression analysis based on publicly available macroeconomic time-series data. The most important limitation of regression analysis in this instance is:

A) the error term of one observation is not correlated with that of another observation.

B) low confidence intervals.

C) limited usefulness in identifying profitable investment strategies.

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Regression analysis based on publicly available data is of limited usefulness if other market participants are also aware of and make use of this evidence.