CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

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

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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