- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 5. Multiple Regression
- Subject 15. Models with Qualitative Dependent Variables

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**CFA Practice Question**

Which of the following statements is (are) true with respect to incorporating qualitative factors into a regression model?

II. In the case of the dependent variable being a qualitative factor, a probit model can be used to estimate the probability of a certain qualitative outcome taking place.

III. In the case of the dependent variable being a qualitative factor, a logit model will use a normal probability distribution to compute the probability of a certain outcome from taking place.

IV. A discriminate analysis is a scoring system, whereby if the collective score from the independent variables exceeds a certain level, a value of 1 will be assigned to the dependent variable.

I. Qualitative factors may be incorporated into the regression through the use of dummy variables that may take on a value of either 1 or -1.

II. In the case of the dependent variable being a qualitative factor, a probit model can be used to estimate the probability of a certain qualitative outcome taking place.

III. In the case of the dependent variable being a qualitative factor, a logit model will use a normal probability distribution to compute the probability of a certain outcome from taking place.

IV. A discriminate analysis is a scoring system, whereby if the collective score from the independent variables exceeds a certain level, a value of 1 will be assigned to the dependent variable.

A. I and II

B. II and III

C. II and IV

**Explanation:**I is incorrect because qualitative factors may be incorporated into the regression through the use of dummy variables that may take on a value of either 1 or 0.

III is incorrect because a logit model will use a logistic distribution and not a normal distribution to compute the probability of a certain outcome from taking place.

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