- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 4. Introduction to Linear Regression
- Subject 6. The predicted value of the dependent variable

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**CFA Practice Question**

An economist is interested in the possible influence of "Miracle Wheat" on the average yield of wheat in a district. To do so he fits a linear regression of average yield per year against year after introduction of "Miracle Wheat" for a ten year period. The fitted trend line is:

YHAT(j) = 80 + 1.5*X(j)

(Y(j): Average yield in j year after introduction)

(X(j): j year after introduction).

B. Do you want to use this trend line to estimate yield for, say, 20 years after introduction? Why? What would your estimate be?

YHAT(j) = 80 + 1.5*X(j)

(Y(j): Average yield in j year after introduction)

(X(j): j year after introduction).

A. What is the estimated average yield for the fourth year after introduction?

B. Do you want to use this trend line to estimate yield for, say, 20 years after introduction? Why? What would your estimate be?

Correct Answer: 86; No

B. No. I would not want to extrapolate that far. If I did, my estimate would be 110, but some other factors probably come into play with 20 years.

A. 80 + 1.5*4 = 86

B. No. I would not want to extrapolate that far. If I did, my estimate would be 110, but some other factors probably come into play with 20 years.

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**User Contributed Comments**
1

User |
Comment |
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darin3200 |
B is very subjective. And most agriculture yields do actually maintain stable growth rates beyond 20 years. US corn yield since 1950 is y = 1.86x - 3616.2 with r-squared of 0.95. |