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123 views46 pagesReading 7 Correlation and Regression
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© © All Rights Reserved
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91672018 Learning Management System
Question #1 of 119
‘A sample of paired points A and B is shown below. What is the covariance between the values
ot Aand 8?
Sample A B
1 1 2
2 4 5
3 9 7
4 1" 10
5 14 12
A) 7.80.
B) 29.76.
© 2055.
Question #2 of 119
Consider a sample of 32 obsetvations on variables X and Y in which the correlation is 0.30. If
the level of significance is 5%, we:
A) conclude that there is no significant correlation between X and Y.
B) cannot test the significance of the correlation with this information,
©) conclude that there is significant correlation between X and Y.
Question #3 of 119
Regression analysis has a number of assumptions. Violations of these assumptions include
which of the following?
A) Residuals that are not normally distributed.
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B) Independent variables that are not normally distributed.
©) Azero mean of the residuals.
Question #4 of 119
‘Suppose the covariance between Y and X is 12, the variance of Y is 25, and the variance of X is,
36, What is the correlation coefficient (r), between Y and X?
A) 0.013.
B) 0.400,
©) 0.160.
Rebecca Anderson, CFA, has recently accepted 2 position asafiniancial analyst with Eagle
Investments. She will be responsible for providing analytical data to Eagle's portfolio manager
for several industries. In addition, she will follow each of the major public corporations within
each of those industries. As one of her first assignments, Anderson has been asked to provide a
detailed report on one of Eagle's current investments, She was given the following data on.
sales for Company XYZ, the maker of toilettissue, as well as toilet tissue industry sales (S
millions). She has been asked to develop @ model to aid in the prediction of future sales levels
for Company XYZ. She proceeds by recalling some of the basic concepts of regression analysis
she learned while she was preparing for the CFA exam.
1 $3,000 $750 84,100
2 $3,200 $800 8,100
3 $3,400 $850 12,100
4 $3,350 $825 3,600
5 $3,500 $900 44,100
Totals $16,450 $4,125 152,000
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Intercept 94.88 32.97 2
Slope (industry 0.2796 0.0363 2
sales)
Analysis of Variance Table (ANOVA)
df (Degrees of | ss(sumof |Mean square
Source Freedom) | Squares) | (ssid | Statistic
1 (tof
Regression | independent | 1189950) 1189950 | 59 ge
(SSR) (MSR)
variables)
Error 3 (n-2) 600.50 (SSE) | 200.17 (MSE)
12,500 (SS
Total 4(n-1) ota
Abbreviated Two-tailed t-table
df 10% 5%
2 2920 | 4303
3 2.353, 3.182
4 2.132, 2.776
Standard error of forecast is 15.5028,
Question #5 of 119
Which of the followingis the correct value of the correlation coefficient between industry sales
and company’sales?
A) 0.9062.
B) 0.9757,
©) 0.2192,
Question #6 of 119
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Which of the following reports the correct value and interpretation of the R? for this regression?
The R? ic:
A) 0.952, indicating that the variability of industry sales explains about 95.2% of the
variability of company sales.
B) 0.048, indicating that the variability of industry sales explains about 4.8% of the
variability of company sales.
©) 0.952, indicating the variability of company sales explains about 95.2% of the variability
of industry sales.
Question #7 of 119
What is the predicted value for sales of Compary XYZ given industrysales of $3,500?
A) $900.00.
B) $883.72,
©) $994.88.
Question #8 of 119
What ic the upper [Link] 3 850 canfidance interval far the predicted value of company sales
(1) given industry sales of $3,307
A) 318.42.
B) 877.13.
©) 827.87,
Question #9 of 119
What is the lower limit of a 95% confidence interval for the predicted value of company sales (Y)
given industry sales of $3,300?
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A) 1,337.06.
B) 778.47,
©) 827.80.
Question #10 of 119
What is the ¢statistic for the slope of the regression line?
A) 3.1820.
B) 2.9600.
©) 7.7025,
Question #11 of 119
Limitations of regression analysis include all of the following EXCEPT:
A) parameter instability.
B) regression results do not indi¢ate anything about economic significance.
©) outliers may affect the estimated regression line.
Question #12 of 119
Consider the following estimated regression equation:
AUTO, = 0.89 + 1.32 Pl
The standard error of the coefficient is 0.42 and the number of observations is 22. The 95%
confidence interval for the slope coefficient, bs,
A) {0.444 < by < 2.196}.
B) {-0.766 < by < 3.406}.
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©) {0.480 67.24
350 9.0 122,500 “81.00
400 85 160,000 Son 72.25
430 10.0 184,9 Se 100.00
390 105 1 4095 110.25
380 9.0 400 «3,420 «81.00
430 11.0 _()te4900 4730 121.00
TOTAL 3,645 91: 1,349,525 33,607 842.24
intercept = 92.2840128
Regressi 1 12,665.125760 12,665.12576
Residual 8 8,257.374238 1,032.17178
Total 9 20,922.5
Jones discusses her findings with her market research specialist, Mira Nair. Nair tells Jones that
she should check her model for heteroskedasticity. She explains that in the presence of
conditional heteroskedasticity, the model coefficients and t-statistics will be biased,
For the questions below, assume a t-value of 2.306.
Question #31 of 119
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Which of the following is closestto the upper limit of the 95% confidence interval for the slope
coefficient?
A) 62.84,
B) 57.61
111,72.
Question #32 of 119
Which of the following is clozestto the lower limit of the 95% confidence inter¥al for the slope
coefficient?
A) 72.84,
B) 11.8/.
©) 12.24.
Question #33 of 119
Which of the following is the CORRECT value of the correlation coefficient between aggregate
revenue and advertising expenditure?
A) 0.9500.
B) 0.7780,
©) 0.6053,
Question #34 of 119
Which of the following reports the CORRECT value and interpretation of the R? for this
regression? The R? is:
A) 0.3947 indicating that the variability of aggregate revenue explains about 39.47% of the
variability in advertising expenditure.
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B) 0.3947 indicating that the variability of advertising expenditure explains about 39.47%
of the variability of aggregate revenue.
©) 0.6053 indicating that the variability of advertising expenditure explains about 60.53%
of the variability In aggregate revenue,
Question #35 of 119
Is Nair's statement about conditional heteroskedasticity CORRECT?
A) No, because the t-statistics will not be biased.
B) Yes, because both the coefficients and t-statistics will be biased.
©) No, because coefficients will not be biased,
Question #36 of 119
What is the calculated F-statistic?
A) 0.1250.
B) 12.2700.
©) 92.2840.
Question #37 of 119
Consider the case when the Y variable isin U.S. dollars and the X variable is in U.S. dollars. The
‘units’ of the covariance between ¥ and X are:
A) arrange of values from ~1 to #1.
B) US. dollars.
©) squared US. dollars.
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Question #38 of 119
study of 40 men finds that their job satisfaction and marital satisfaction scores have a
correlation coefficient of 0.52. At 5% level of significance, is the correlation coefficient
significantly different from 0?
A) Yes, t= 3.76.
B) No, t= 2.02,
©) No, t= 1.68.
Question #39 of 119
‘A dependent variable is regressed against a single independent variable across 100
observations. The mean squared error Is 2.807, and the mean regression sum of squares Is
117.9. What is the correlation coefficient between the two-vatiables?
A) 030,
B) 0.99.
©) 055.
Question #40 of 119
Which of the following Statements about the stendard error of estimate is /east accurate? The
standard error ofestimate:
A) is the square of the coefficient of determination.
B) measures the Y variable's variability that is not explained by the regression equation.
©) is the square root of the sum of the squared deviations from the regression line divided
by (n= 2),
Question #41 of 119
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Which of the following statements regarding scatter plots is most accurate? Scatter plots:
A) illustrate the scatterings of a single variable.
B) are used to examine the third moment of a distribution (skewness).
©) illustrate the relationship between two variables.
Question #42 of 119
Which of the following statements regarding a correlation coefficient of 0.60 for two variables Y
and Xis most accurate? This corrclation:
A) is significantly different from zero.
B) indicates a positive covariance between the two variables.
©) indicates a positive causal relation between the two variables.
Question #43 of 119
IX and ¥ are perfectly correlated, regressing Y onto X will result in which of the following:
A) the regression line will be(sloped upward.
B) the standard error of estirhate will be zero,
© the alpha coefficient will be zero.
Question #44 of 119
The table below shows a sample of returns on two securities:
Security P 0.2% 0.5% 1.1% 0.6% 0.3%
Security Q 0.3% 0.9% 1.5% -0.5% 0.4%
‘The sample covariance between the two securities’ returns Is closest to:
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A) 0.62.
B) 0.78.
9) 047,
Milky Way, Inc. is a large manufacturer of children’s toys and games based in the United States.
Their products have high name brand recognition, and have been sold in retail outlets
throughout the United States for nearly fifty yeers. The founding management team was
bought out by a group of investors five years ago. The new management team, led by Russell
Stepp, decided that Milky Way should try to expand its sales into the Western European market,
which had never been tapped by the former owners, Under Stepo's leadership, additional
personnel are hired in the Research and Development department, and anew marketing plan
specific to the European market is implementec. Being a new player id [Link] market,
Stepp knows that it will take several years for Milky Way to establish its Brand name in the
‘marketplace, and is willing to make the expenditures now inyexchange for increased future
profitability
Now, five years after entering the European market, Stepp is reviewing the results of his plan.
Sales in Europe have slowly but steadily increas#d over since Milky Way's entrance into the
‘market, but profitability seems to have leveled oUt. Stepp decides to hire a consultant, Ann
Hays, CFA, to review and evaluate their European strategy. One of Hays’ first tasks on the job is
to perform a regression analysis of Milky Way's European sales. She is seeking to determine
whether the additional expenditutes‘on research and development and marketing for the
European market should Be continued in the future.
Hays begins by establishing a relationship between the European sales of Milky Way (in millions
of dollars) and th tho independent variables, the number of dollars (in millions) spent on
research and development (R&D) and marketing (MKTG). Based upon five years of monthly
data, Hays constructs the following estimated regression equation:
Estimated Sales = 54.82 + 5.97 (MKTG) + 1.45 (R&D)
Additionally, Hays calculates the following regression estimates:
Intercept 54.82 3.165,
MKTG 5.97 1.825
R&D 1.45 0.987
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Question #45 of 119
Hays begins the analysis by determining if both of the independent variables are statistically
significant. To test whether a coefficient is statistically significant means to test whether itis
statistically significantly different from:
A) zero.
B) the upper tail critical value.
©) slope coefficient.
Question #46 of 119
‘The estatistic for the marketing variable is calculated to be:
A) 1.886.
B) 3.271
©) 17.321
Question #47 of 119,
Hays formulates a test structure where the decision rule is to reject the null hypothesis if the
calculated test statistic Is either larger than the upper tall critical value or lower than the lower
tail critical value®At @ 5% significance level with 57 degrees of freedom, assume that the two-
tailed critical Eales are te = +2.004. Based on this information, Hays makes the following
conclusions:
‘* Point 1: The intercept term is statistically significant.
* Point 2: Both independent variables are statistically significant in the model explaining
sales for Milky Way, Inc.
‘Point 3: If an Ftest were being used, the null hypothesis would be rejected.
Which of Hays' conclusions are CORRECT?
A) Points 1 and 3.
B) Points 1 and 2,
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©) Points 2 and 3.
Question #48 of 119
Hays is aware that part, but not all, of the total variation in expected sales can be explained by
the regression equation. Which of the following statements correctly reflects this relationship?
A) SST = RSS + SSE + MSE.
B) MSE = RSS + SSE.
©) SST ~ RSS + SSE.
Question #49 of 119
Hays decides to test the overall effectiveness of th@\both Independent variables in explaining
sales for Milky Way. Assuming that the total sum/of SqUares is 389.14, the sum of squared
errors is 146.85 and the mean squared errofis 2,576, then
A) The R? equals 0.242, indicating that the two independent variables account for 24.2% of
the variation in monthly sales
B) The R? equals 0.623, indicating that the two independent variables together account for
37.7% of the variatiomin monthly sales.
©) The correlation between the actual and predicted valucs of estimated sales is 0.79.
Question #50 of 119
Stepp is concerned about the validity of Hays! regression analysis and asks Hays if he can test
for the presence of heteroskedasticity. Hays complies with Stepp's request, and detects the
presence of unconditional Hever oskedasticity. Which of the following statements reger
heteroskedasticity is most correct?
A) Heteroskedasticity can be detected either by examining scatter plots of the residual or
by using the Durbin-Watson test
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B) Unconditional heteroskedasticity does create significant problems for statistical
inference.
©) Unconditional heteroskedasticity usually causes no major problems with the regression
Question #51 of 119
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) low confidence intervals.
B) limited usefulness in identifying profitable investment strategiés,
©) the error term of one observation is not correlated with that of another observation.
Question #52 of 119
‘An analyst is examining the relationship between two random variables, RCRANTZ and GSTERN.
He performs a linear regression that produces an estimate of the relationship:
RCRANTZ = 61.4 S.9GSTERN
Which interpretation of this regression equation is feast accurate?
A) The intercept'term implies that if GSTERN is zero. RCRANTZ is 61.4.
B) The covariance of RCRANTZ and GSTERN is negative.
©) If GSTERN increases by one unit, RCRANTZ should increase by 5.9 units.
Question #53 of 119
‘The most appropriate test statistic to test statistical significance of a regression slope
coefficient with 45 observations and 2 indepencent variables is a:
A) onc tail estatistic with 42 degrees of freedom.
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B) one-tail tstatistic with 43 degrees of freedom.
€) two-tail tstatistic with 42 degrees of freedom
A study of a sample of incomes (in thousands of dollars) of 35 individuals shows that income is
related to age and years of education, The following table shows the regression results:
Coefficient | Standard Error} t-statistic P-value
Intercept 5.65 1.27 4.44 0.01
Age 0.53 2 1.33 0.21
Years of
2
Education 2.32 0.41 ? 0.01
Anova of SS MS FE
Regression 2 215.10 2 ?
Error 115.10 2
Total 2 2
Question #54 of 119
‘The standard error for the coefficient Of age and ¢-statistic for years of education are:
A) 0.40; 5.66.
B) 0.53; 2.96,
©) 0.32; 1.65.
Question #55 of 119
The mean square regression (MSR) is:
A) 102.10.
B) 6.72.
©) 107.55,
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Question #56 of 119
‘ne mean square error (ME) is:
A) 3.60.
B) 3.58.
O71
Question #57 of 119
What is the R? for the regression?
A) 76%.
B) 65%,
©) 62%.
Question #58 of 119.
What is the predicted incoine of @ 40-year-old married female with 16 years of education and
18 years of work experience?
A) $63,970.
B) $82,706.
©) $106,930.
Question #59 of 119
What is the F-value?
A) 29.88.
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B) 1.88.
©) 14.36.
Question #60 of 119
‘An analyst performs two simple regressions. The first regression analysis has an R-squared of
0.40 and a beta coefficient of 1.2. The second regression analysis has an R-squared of 0.77 and
a beta coefficient of 1.75. Which one of the following statements is most accurate?
A) The R-squared of the first regression indicates that there is a 0.40 corfelation between
the independent and the dependent variables.
B) The second regression equation has more explaining powenthan the'first regression
equation
€) The first regression equation has more explaining power than the second regression
equation.
Question #61 of 119
‘A sample covariance of two rafidOmi Variables is most likely to be used to:
A) demonstrate that the Value of one of the variables determines the value of the other.
B) calculate the correlation coefficient, which is a measure of the strength of the variables’
linear relationship.
©) identify and: measure the strength of linear and nonlinear relationships between the
two variables.
Question #62 of 119
‘The Y variable is regressed against the X variable resulting in a regression line that is horizontal
with the plot of the paired observations widely dispersed about the regression line. Based on
this information, which statement is most likelyaccurate?
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A) Xis perfectly positively correlated to Y.
B) The R? of this regression is close to 100%.
©) The correlation between X and Y is close to zero.
Question #63 of 119
In order to have a negative correlation between two variables, which of the following is most
accurate?
A) Elther the covariance or one of the standard deviations must be negative,
B) The covariance must be negative.
©) The covariance can never be negati
Question #64 of 119
Determine and interpret the correlation coefficient for the two variables X and Y. The standard
deviation of X is 0.05, the standard deviation of ¥ is 0.08, and their covariance Is -0.003,
A) -1.33 and the two variables'ar@negatively associated.
B) +0.75 and the two variables are positively associated.
€) -0.75 and the two Variables are negatively associated.
Question #65 of 119
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‘Asimple linear regression is run to quantify the relationship between the return on the
common stocks of medium sized companies (Mid Caps) and the return on the S&P 500 Index,
using the monthly return on Mid Cap stocks as the dependent variable and the monthly return
fn the SRP SAN as the independent variahla The rasults af the regressinn are shawn helnwe
Intercept Pal 2.950 0.58
S&P 500 152 0.130 11.69
R?= 0,599
‘The strength of the relationship, as measured by the correlation coefficient, between the return
‘on Mid Cap stocks and the return on the S&P 500 for the period under sttidy was:
A) 0.774,
B) 0.599,
©) 0.130.
Question #66 of 119
\
Consider the following analysis of variance (ANOVA) table:
Regression}. 500. 1 500
Error 750 50, 15
Total 1,250 51
‘The R? and the F-statistic are, respectively:
A) R2 = 0.40 and F = 33.333.
B) R? = 0.40 and F=0.971.
© rR? = 0.67 and F=0.971
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Question #67 of 119
Paul Frank is an analyst for the retail industry. He Is examining the role of television viewing by
teenagers on the sales of accessory stores. He gathered data and estimated the following
regression of sales (in millions of dollars) on the number of hours watched by teenagers (TV, in
hours per week):
Sales, = 1.05 + 1.6 TV;
‘The predicted sales if television watching Is 5 hours per week is:
A) $9.05 million,
B) $8.00 million.
© $2.65 million.
Question #68 of 119
‘The assumptions underlying linear regression in¢lude all of the following EXCEPT the:
A) independent variable is linearly related to the residuals (or disturbance term).
B)
turbance term is homoskedastic and is independently distributed,
€) disturbance term is normally distributed with an expected value ot 0.
Question #69 of 119
For the case of simple linear regression with one independent variable, which of the following,
statements about the correlation coefficient is least accurate?
A) If the regression line is flat and the observations are dispersed uniformly about the line,
the correlation coefficient will be +1
B) The correlation coefficient can vary between -1 and +1.
€) If the correlation coefficient is negative, it indicates that the regression line has a
negative slope coefficient,
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Craig Standish, CFA, is investigating the validity of claims associated with a fund that his
company offers, The company advertises the fund as having low turnover and, hence, low
management fees, The fund was created two years ago with only a few uncorrelated assets,
Standlich randomly draws two starks fram the fund, Grey Corparatian and Jars ine. and
‘measures the variances and covariance of their monthly returns over the past two years. The
resulting variance covariance matrix is shown balow. Standish will test whether itis reasonable
to believe that the returns of Grey and Jars are uncorrelated. In doing the analysis, he plans to
address the issue of spurious correlation and outliers.
Grey 42.2 20.8
Jars 20.8 36.5
Standish wants to learn more about the performance of the tm er alinear
regression of the fund's monthly returns over the past two “ee
jige capitalization index.
The results are below:
Regression 1 2.530 92.53009 28.09117
Residual 22 ee 3.293921
Total 23 164.9963
Intercept 148923, 0.391669 0.380225 0.707424
Large C 1.205602 0.227467 5.30011 2.56E-05
Index
Standish forecasts the fund's return, based upon the prediction that the return to the large
capitalization index used in the regression will ke 10%. He also wants to quantify the degree of
the prediction error, as well as the minimum and maximum sensitivity that the fund actually.
has with respect to the index.
He plans to summarize his results in a report. in the report, he will also include caveats
concerning the limitations of regression analysis, He lists four limit
ions of regression analysis
that he feels are important: relationships between variables can change over time,
consistent estimates of regression coefficients, if the error terms are
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heteroskedastic the standard errors for the regression coefficient may not be reliable, and if
the error terms are correlated with each other over time the test statistics may not be reliable.
Question #70 of 119
Given the variance/covariance matrix for Grey and Jars, in a one-sided hypothesis test that the
returns are positively correlated Hg: p sO vs. Hy :p > 0, Standish would:
‘A) need to gather more information before being able to reach a conclusion concerning
significance.
B) reject the null at the 5% but not the 1% level of significance.
€) reject the null at the 19 level of significance.
Question #71 of 119
In using the correlation coefficient between returns on Grey and Jars, Standish would most
appropriately question the issue of:
A) spurious correlation but not the i8ste Of outliers.
B) issue of outliers but not the issue of spurious correlation.
©) Both spurious correlation and outliers.
Question #72 of 119
Ifthe large capitalization index has a 10% return, then the forecast of the fund's return will be:
A) 16.1
B) 13.5.
©) 12.2.
Question #73 of 119
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The standard deviation of monthly fund returnsis closest to:
A) 2.68.
B) 12.84.
7.17,
Question #74 of 119
4.95% confidence interval for the slope coefficient
A) 0.905 to 1.506.
B) 0.760 to 1.650.
©) 0.734 to 1.677.
Question #75 of 119
Of the four caveats of regression analsis listed by Standish, the feast accurate is:
A) the relationships of variableschange over time.
B) if the error terms are heteroskedastic the standard errors for the regression coefficients
may not be reliables
© multicollinearity. leads to inconsistent estimates of the regression coefficients.
Question #76 of 119
Consider the following estimated regression equation:
ROE, = 0.23 - 1.50 CE
‘The standard error of the coefficient is 0,40 and the number of observations is 32. The 959%
confidence interval for the slope coefficient, bs, is:
A) (2.317 < by <-0.683}.
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Learning Management System
B) {0.683
