Kaplan Schweser Printable Quizzes - Quiz 5

Quiz ID#: 12851568

Question 1 - #67244

A regression analysis has the goal of:

A) measuring how the properties of the variables regress towards each other.
B) estimating how changes in dependent variable affect an independent variable.
measuring the tendency of both independent and dependent variables to regress towards their
C)
respective means.
D) estimating how changes in independent variables affect a dependent variable.

Your answer: B was incorrect. The correct answer was D) estimating how changes in independent variables
affect a dependent variable.
A regression analysis has the goal of measuring how changes in one variable, called a dependent or explained
variable, can be explained by changes in one or more other variables called the independent or explanatory
variables.
This question tested from Topic Area 2, Topic 14, AIM 1

Question 2 - #67246

In a regression analysis, the effects from independent variables that are not included in the model are embodied
in the:

A) intercept.
B) scattergram.
C) slope coefficient.
D) error term.

Your answer: B was incorrect. The correct answer was D) error term.
The error term embodies the effect of variables omitted from the model.
This question tested from FRM Online Component frm_1m, Topic Area 2, Topic 14

Question 3 - #8643

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 (in hours per week):

Salest = 1.05 + 1.6 TVt

Which of the following is the most accurate interpretation of the estimated results? If TV watching:

A) goes up by one hour per week, sales of accessories increase by $1.60.

B) goes up by one hour per week, sales of accessories increase by $1.6 million.
C) changes, no change in sales is expected.
D) is zero (that is, every teenager turns off the TV for a week), the expected sales of accessories is $0.

Your answer: B was correct!

The interpretation of the slope coefficient is the change in the dependent variable (sales in millions of dollars) for
a given one-unit change in the independent variable (TV hours per week). The intercept of 1.05 means that 1.05
million dollars worth of accessories is expected to be sold even if TV watching is zero.
This question tested from Topic Area 2, Topic 14, AIM 2

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 Question 4 - #39724

In the scatter plot below, the correlation between the return on stock A and the market index is:

A) negative.
B) zero.
C) not discernable using the scatter plot.
D) positive.

Your answer: C was incorrect. The correct answer was D) positive.

In the scatter plot, higher values of the return on stock A are associated with higher values of the return on the
market, i.e. a positive correlation between the two variables.
This question tested from Topic Area 2, Topic 14, AIM 1

Question 5 - #67247

Which of the following are included in a sample regression function?

I. The intercept.
II. The error term.
III. The slope coefficient.
IV. The independent variable.

A) I, II, III, and IV.

B) III and IV only.
C) I, III, and IV only.
D) I and III only.

Your answer: B was incorrect. The correct answer was C) I, III, and IV only.
The sample regression function has a residual and not an error term. Although the residual and error term serve a
similar purpose in their respective equations, there are distinctions.
This question tested from Topic Area 2, Topic 14, AIM 3

Question 6 - #1932

A simple 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 on the S&P 500 as the independent variable. The results of the
regression are shown below:

Standard Error
Coefficient t-Value
of coefficient
Intercept 1.71 2.950 0.58

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 S&P 500 1.52 0.130 11.69
2
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 study was:

A) 0.599.
B) 2.950.
C) 0.130.
D) 0.774.

Your answer: B was incorrect. The correct answer was D) 0.774.

You are given R2 or the coefficient of determination of 0.599 and are asked to find R or the coefficient of
correlation. The square root of 0.599 = 0.774.

This question tested from Topic Area 2, Topic 14, AIM 10

Question 7 - #39722

Which of the following statements regarding scatter plots is most accurate? Scatter plots:

A) are used to examine the third moment of a distribution (skewness).

B) are used to examine the fourth moment of a distribution (kurtosis).
C) illustrate the scatterings of a single variable.
D) illustrate the relationship between two variables.

Your answer: B was incorrect. The correct answer was D) illustrate the relationship between two variables.
A scatter plot is a collection of points on a graph where each point represents the values of two variables. They
are used to examine the relationship between two variables.
This question tested from Topic Area 2, Topic 14, AIM 1

Question 8 - #1925

The purpose of regression is to:

A) explain the variation in the dependent variable.

B) explain the variation in the independent variable.
C) get the largest R2 possible.
D) explain the mean of the independent variable.

Your answer: B was incorrect. The correct answer was A) explain the variation in the dependent variable.
The goal of a regression is to explain the variation in the dependent variable.
This question tested from Topic Area 2, Topic 14, AIM 1

Question 9 - #8661

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):

Salest = 1.05 + 1.6 TVt

The predicted sales if television watching is 5 hours per week is:

A) $8.00 million.
B) $2.65 million.
C) $9.05 million.
D) $1.05 million.

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 Your answer: B was incorrect. The correct answer was C) $9.05 million.
The predicted sales are: Sales = $1.05 + [$1.6 (5)] = $1.05 + $8.00 = $9.05 million.
This question tested from Topic Area 2, Topic 14, AIM 2

Question 10 - #67249

Trudy Baker, FRM and Steven Phillips, FRM are planning to do a regression analysis. They discuss specifying
2
the equation they wish to estimate. Baker proposes the specification E(Y i|Xi) = B0 + (B1) × (Xi ). Phillips
2
proposes the specification (Yi|Xi) = B0 + (B1 × Xi) . Which, if either, is appropriate using linear regression?

A) The specification of Baker but not that of Phillips.

B) Neither the specification of Baker nor that of Phillips.
C) The specification of Phillips but not that of Baker.
D) Both the specification of Baker and Phillips.

Your answer: B was correct!

Since the specification of Phillips would essentially be B0 + (B12) × (Xi2), this precludes the application of linear
regression analysis because there is an exponent on B1, i.e., the specification is nonlinear with respect to the
parameters. E(Y i|Xi) = B0 + (B1) × (Xi2) is also not a linear function

This question tested from Topic Area 2, Topic 14, AIM 4

Question 11 - #8662

Consider the regression results from the regression of Y against X for 50 observations:

Y = 5.0 - 1.5 X

The standard error of the estimate is 0.40 and the standard error of the coefficient is 0.45. The predicted value
of Y if X is 10 is:

A) -10.
B) 10.
C) 20.
D) 4.5.

Your answer: B was incorrect. The correct answer was A) -10.

The predicted value of Y is: Y = 5.0 – [1.5 (10)] = 5.0 – 15 = -10
This question tested from Topic Area 2, Topic 14, AIM 2

Question 12 - #1928

The independent variable in a regression equation is called all of the following EXCEPT:

A) explanatory variable.
B) exogenous variable.
C) predicted variable.
D) predicting variable.

Your answer: B was incorrect. The correct answer was C) predicted variable.
The dependent variable is the predicted variable.
This question tested from Topic Area 2, Topic 14, AIM 1

Question 13 - #1931

Unlike the coefficient of determination, the coefficient of correlation:

A) measures the strength of association between the two variables more exactly.

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 B) indicates whether the slope of the regression line is positive or negative.
C) can have an absolute value greater than 1.
D) indicates the percentage of variation explained by a regression model.

Your answer: B was correct!

In a simple linear regression the coefficient of determination (R2) is the squared correlation coefficient, so it is
positive even when the correlation is negative.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 14 - #1955

Which of the following is least likely an assumption of linear regression?

A) The independent variable is correlated with the residuals.

B) The residuals are normally distributed.
C) There is a linear relation between the dependent and independent variables.
D) The variance of the residuals is constant.

Your answer: B was incorrect. The correct answer was A) The independent variable is correlated with the
residuals.
The assumption is that the independent variable is uncorrelated with the residuals.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 15 - #1976
2
A simple linear regression equation had a coefficient of determination (R ) of 0.8. What is the correlation
coefficient between the dependent and independent variables and what is the covariance between the two
variables if the variance of the independent variable is 4 and the variance of the dependent variable is 9?

Correlation
coefficient Covariance

A) 0.91 4.80
B) 0.89 5.34
C) 0.89 4.80
D) 0.91 5.34

Your answer: B was correct!

The correlation coefficient is the square root of the R2, r = 0.89.

To calculate the covariance multiply the correlation coefficient by the product of the standard deviations of the two
variables:

COV = 0.89 × √4 × √9 = 5.34

This question tested from Topic Area 2, Topic 14, AIM 10

Question 16 - #23302

Which term is least likely to apply to a regression model?

A) Goodness of fit.
B) Coefficient of variation.
C) R2.
D) Coefficient of determination.

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 Your answer: B was correct!
Goodness of fit, coefficient of determination and R2 are different names for the same concept. The coefficient of
variation is not directly part of a regression model.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 17 - #22979

Which of the following is least likely an assumption of a simple regression?

A) The error term is normally distributed.

B) The expected value of the error term is zero.
C) The variance of the error term is one.
D) There is a linear relationship between dependent and independent variables.

Your answer: B was incorrect. The correct answer was C) The variance of the error term is one.
There is no requirement that the variance of the error term should be equal to one.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 18 - #67253

Sample regression coefficients are often estimated with a process known as:

A) a scattergram.
B) ordinary least squares.
C) a population regression function.
D) Ockham's razor.

Your answer: B was correct!

Ordinary least squares or OLS is a method for estimating population coefficients. It provides the line that
minimizes the squared deviations of the dependent variables in the sample from the sample regression line.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 19 - #1956

Which of the following is least likely an assumption of linear regression? The:

A) expected value of the residuals is zero.

B) residuals are mean reverting; that is, they tend towards zero over time.
C) variance of the residuals is constant.
D) residuals are independently distributed.

Your answer: B was correct!

The assumptions regarding the residuals are that the residuals have a constant variance, have a mean of zero,
and are independently distributed.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 20 - #1971

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 first regression equation has more explaining power than the second regression equation.
B) The second regression equation has more explaining power than the first regression equation.
The beta coefficient of the 2nd regression indicates that this regression has more explaining power
C)
than the first.

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 The R-squared of the first regression indicates that there is a 0.40 correlation between the
D)
independent and the dependent variables.

Your answer: C was incorrect. The correct answer was B) The second regression equation has more explaining
power than the first regression equation.
The coefficient of determination (R-squared) is the percentage of variation in the dependent variable explained by
the variation in the independent variable. The larger R-squared (0.77) of the second regression means that 77%
of the variability in the dependent variable is explained by variability in the independent variable, while only 40% of
that is explained in the first regression. This means that the second regression has more explaining power than
the first regression. Note that the Beta is the slope of the regression line and doesn’t measure explaining power.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 21 - #1939

Which of the following statements regarding the coefficient of determination is least accurate? The coefficient of
determination:

is the percentage of the total variation in the dependent variable that is explained by the independent
A)
variable.
B) cannot decrease as independent variables are added to the model.
C) may range from −1 to +1.
D) is the ratio of explained variation to total variation.

Your answer: B was incorrect. The correct answer was C) may range from −1 to +1.
In a simple regression, the coefficient of determination is calculated as the correlation coefficient squared and
ranges from 0 to +1.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 22 - #1970
2
What does the R of a simple regression of two variables measure and what calculation is used to equate the
correlation coefficient to the coefficient of determination?

2 Correlation coefficient
R measures:

percent of variability of the

dependent variable that is 2 2
A) R =r
explained by the variability of the
independent variable
percent of variability of the
independent variable that is 2
B) R =r×2
explained by the variability of the
dependent variable
percent of variability of the
dependent variable that is 2
C) R =r×2
explained by the variability of the
independent variable
percent of variability of the
independent variable that is 2 2
D) R =r
explained by the variability of the
dependent variable

Your answer: B was incorrect. The correct answer was A)

percent of variability of the
dependent variable that is 2 2
explained by the variability of the R = r
independent variable

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 R2, or the Coefficient of Determination, is the square of the coefficient of correlation (r). The coefficient of
correlation describes the strength of the relationship between the X and Y variables. The standard error of the
residuals is the standard deviation of the dispersion about the regression line. The t-statistic measures the
statistical significance of the coefficients of the regression equation. In the response: "percent of variability of the
independent variable that is explained by the variability of the dependent variable," the definitions of the variables
are reversed.

This question tested from Topic Area 2, Topic 14, AIM 10

Question 23 - #1924

Joe Harris is interested in why the returns on equity differ from one company to another. He chose several
company-specific variables to explain the return on equity, including financial leverage and capital expenditures. In
his model:

return on equity is the independent variable, and financial leverage and capital expenditures are
A)
dependent variables.
return on equity is the explanatory variable, and financial leverage and capital expenditure are the
B)
explained variables.
C) return on equity, financial leverage, and capital expenditures are all independent variables.
return on equity is the dependent variable, and financial leverage and capital expenditures are
D)
independent variables.

Your answer: B was incorrect. The correct answer was D) return on equity is the dependent variable, and
financial leverage and capital expenditures are independent variables.
The dependent variable is return on equity. This is what he wants to explain. The variables he uses to do the
explaining (i.e., the independent variables) are financial leverage and capital expenditures.
This question tested from Topic Area 2, Topic 14, AIM 1

Question 24 - #1959

The assumptions underlying linear regression include all of the following EXCEPT the:

A) disturbance term is normally distributed with an expected value of 0.

B) disturbance term is homoskedastic and is independently distributed.
C) dependent variable and independent variable are linearly related.
D) independent variable is linearly related to the residuals (or disturbance term).

Your answer: B was incorrect. The correct answer was D) independent variable is linearly related to the residuals
(or disturbance term).
The independent variable is uncorrelated with the residuals (or disturbance term).

The other statements are true. The disturbance term is homoskedastic because it has a constant variance. It is
independently distributed because the residual for one observation is not correlated with that of another
observation. Note: The opposite of homoskedastic is heteroskedastic. For the examination, memorize the
assumptions underlying linear regression!

This question tested from Topic Area 2, Topic 14, AIM 10

Question 25 - #47796

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 − 5.9GSTERN

Which interpretation of this regression equation is least accurate?

A) The covariance of RCRANTZ and GSTERN is negative.

B) The intercept term implies that if GSTERN is zero, RCRANTZ is 61.4.

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 C) In this regression, RCRANTZ is the dependent variable and GSTERN is the independent variable.
D) If GSTERN increases by one unit, RCRANTZ should increase by 5.9 units.

Your answer: B was incorrect. The correct answer was D) If GSTERN increases by one unit, RCRANTZ should
increase by 5.9 units.
The slope coefficient in this regression is -5.9. This means a one unit increase of GSTERN suggests a decrease
of 5.9 units of RCRANTZ. The slope coefficient is the covariance divided by the variance of the independent
variable. Since variance (a squared term) must be positive, a negative slope term implies that the covariance is
negative.
This question tested from Topic Area 2, Topic 14, AIM 2

Question 26 - #8660

A simple 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 on the S&P 500 as the independent variable. The results of the
regression are shown below:

Coefficient Standard Error of Coefficient t-Value

Intercept 1.71 2.950 0.58
S&P 500 1.52 0.130 11.69
2
R = 0.599

Use the regression statistics presented above and assume this historical relationship still holds in the future
period. If the expected return on the S&P 500 over the next period were 11%, the expected return on Mid Cap
stocks over the next period would be:

A) 33.8%.
B) 25.6%.
C) 18.4%.
D) 20.3%.

Your answer: B was incorrect. The correct answer was C) 18.4%.

Y = intercept + slope(X)
Mid Cap Stock returns = 1.71 + 1.52(11) =18.4%
This question tested from Topic Area 2, Topic 14, AIM 2

Question 27 - #8642

In the estimated regression equation Y = 0.78 - 1.5 X, which of the following is least accurate when interpreting
the slope coefficient?

A) The dependent variable declines by -1.5 units if X increases by 1 unit.

B) The dependent variable increases by 1.5 units if X decreases by 1 unit.
C) If the value of X is zero, the value of Y will be -1.5.
D) -1.5 is the elasticity of Y with respect to X.

Your answer: B was incorrect. The correct answer was C) If the value of X is zero, the value of Y will be -1.5.
The slope represents the change in the dependent variable for a one-unit change in the independent variable. If
the value of X is zero, the value of Y will be equal to the intercept, in this case, 0.78.
This question tested from Topic Area 2, Topic 14, AIM 2

Question 28 - #1969

Linear regression is based on a number of assumptions. Which of the following is least likely an assumption of
linear regression?

A) Values of the independent variable are not correlated with the error term.

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 B) There is at least some correlation between the error terms from one observation to the next.
C) A linear relationship exists between the dependent and independent variables.
D) The variance of the error terms each period remains the same.

Your answer: B was correct!

When correlation exists, autocorrelation is present. As a result, residual terms are not normally distributed. This is
inconsistent with linear regression.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 29 - #1941

Assume you perform two simple regressions. The first regression analysis has an R-squared of 0.80 and a beta
coefficient of 0.10. The second regression analysis has an R-squared of 0.80 and a beta coefficient of 0.25.
Which one of the following statements is most accurate?

A) Results from both analyses are equally reliable.

B) Results from the first analysis are more reliable than the second analysis.
C) Results of the second analysis are more reliable than the first analysis.
The influence on the dependent variable of a one-unit increase in the independent variable is the same
D)
in both analyses.

Your answer: B was incorrect. The correct answer was A) Results from both analyses are equally reliable.
The coefficient of determination (R-squared) is the percentage of variation in the dependent variable explained by
the variation in the independent variable. The R-squared (0.80) being identical between the first and second
regressions means that 80 percent of the variability in the dependent variable is explained by variability in the
independent variable for both regressions. This means that the first regression has the same explaining power as
the second regression.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 30 - #2004

Sera Smith, a research analyst, had a hunch that there was a relationship between the percentage change in a
firm’s number of salespeople and the percentage change in the firm’s sales during the following period. Smith ran
2
a regression analysis on a sample of 50 firms, which resulted in a slope of 0.72, an intercept of +0.01, and an R
value of 0.65. Based on this analysis, if a firm made no changes in the number of sales people, what percentage
change in the firm’s sales during the following period does the regression model predict?

A) +1.00%.
B) +0.72%.
C) +0.65%.
D) +0.10%.

Your answer: B was incorrect. The correct answer was A) +1.00%.

The slope of the regression represents the linear relationship between the independent variable (the percent
change in sales people) and the dependent variable, while the intercept represents the predicted value of the
dependent variable if the independent variable is equal to zero. In this case, the percentage change in sales is
equal to: 0.72(0) + 0.01 = +0.01.
This question tested from Topic Area 2, Topic 14, AIM 2

Question 31 - #39723

If the correlation between two variables is −1.0, the scatter plot would appear along a:

A) straight line running from southwest to northeast.

B) a curved line centered in the scatter plot.
C) straight line running from northwest to southeast.
D) a curved line running from southwest to northeast.

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 Your answer: B was incorrect. The correct answer was C) straight line running from northwest to southeast.
If the correlation is −1.0, then higher values of the y-variable will be associated with lower values of the
x-variable. The points would lie on a straight line running from northwest to southeast.
This question tested from Topic Area 2, Topic 14, AIM 1

Question 32 - #1926

The capital asset pricing model is given by: Ri =Rf + Beta ( Rm -Rf) where Rm = expected return on the market,
Rf = risk-free market and Ri = expected return on a specific firm. The dependent variable in this model is:

A) Rf.
B) Rm.
C) Ri.
D) Rm - Rf.

Your answer: C was correct!

The dependent variable is the variable whose variation is explained by the other variables. Here, the variation in ri
is explained by the variation in the other variables, rf and rm.

This question tested from Topic Area 2, Topic 14, AIM 1

Question 33 - #1957

Which of the following is least likely an assumption of linear regression analysis?

A) The error term is normally distributed.

B) The X values are uncorrelated with the error terms.
C) The expected value of the residuals is zero.
D) The Y values are all less than 3 standard deviations from the regression line.

Your answer: B was incorrect. The correct answer was D) The Y values are all less than 3 standard deviations
from the regression line.
In a normal distribution, approximately 99%, but not necessarily all, of the observations are within 3 standard
deviations of the regression line.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 34 - #8659

Given: Y = 2.83 + 1.5X

What is the predicted value of the dependent variable when the value of an independent variable equals 2?

A) -0.55
B) 5.83
C) 6.50
D) 2.83

Your answer: B was correct!

Y = 2.83 + (1.5)(2)
= 2.83 + 3
= 5.83
This question tested from Topic Area 2, Topic 14, AIM 2

Question 35 - #1958

Which of the following statements about linear regression analysis is most accurate?

A) An assumption of linear regression is that the residuals are independently distributed.

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 The coefficient of determination is defined as the strength of the linear relationship between two
B)
variables.
C) A perfectly negative correlation can be depicted by a correlation coefficient of +1.
When there is a strong relationship between two variables we can conclude that a change in one will
D)
cause a change in the other.

Your answer: B was incorrect. The correct answer was A) An assumption of linear regression is that the
residuals are independently distributed.
Even when there is a strong relationship between two variables, we cannot conclude that a causal relationship
exists. The coefficient of determination is defined as the percentage of total variation in the dependent variable
explained by the independent variable.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 36 - #1940

Assume an analyst performs two simple regressions. The first regression analysis has an R-squared of 0.90 and
a slope coefficient of 0.10. The second regression analysis has an R-squared of 0.70 and a slope coefficient of
0.25. Which one of the following statements is most accurate?

A) Results of the second analysis are more reliable than the first analysis.
The influence on the dependent variable of a one unit increase in the independent variable is 0.9 in the
B)
first analysis and 0.7 in the second analysis.
C) The first regression has more explanatory power than the second regression.
The influence on the dependent variable of a one unit increase in the independent variable is 0.7 in the
D)
first analysis and 0.9 in the second analysis.

Your answer: B was incorrect. The correct answer was C) The first regression has more explanatory power than
the second regression.
The coefficient of determination (R-squared) is the percentage of variation in the dependent variable explained by
the variation in the independent variable. The larger R-squared (0.90) of the first regression means that 90
percent of the variability in the dependent variable is explained by variability in the independent variable, while 70
percent of that is explained in the second regression. This means that the first regression has more explanatory
power than the second regression. Note that the Beta is the slope of the regression line and doesn’t measure
explanatory power.
This question tested from Topic Area 2, Topic 14, AIM 10

Question 37 - #67255

As part of a regression analysis, an analyst finds that: Y – b1 × X = -1.8 and b1 = 3.2. Based upon these results,
for every unit increase in the independent variable, on average the dependent variable increases by:

A) 1.4.
B) 3.2.
C) 1.8.
D) 5.0.

Your answer: B was correct!

b1 gives the slope coefficient which indicates the average change in the dependent variable given a unit change in
the independent variable.
This question tested from Topic Area 2, Topic 14, AIM 10

© 2014 Kaplan Schweser

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