- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 3. Model Misspecification
- Subject 4. Multicollinearity
CFA Practice Question
When multicollinearity is present in a linear regression, which of the following is true?
II. The regression cannot be estimated.
III. The interpretation of the regression is problematic.
IV. The t-statistics will be too large.
I. The residuals will be serially correlated.
II. The regression cannot be estimated.
III. The interpretation of the regression is problematic.
IV. The t-statistics will be too large.
Correct Answer: III
The interpretation of the regression is problematic, but the regression can be estimated. The t-statistics may decrease substantially when multicollinearity is present, yet the r-squared may remain high.
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