CFA Practice Question

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CFA Practice Question

Which of the following statements is false with respect to the standard error of estimate (SEE)?
A. The higher the SEE value, the more reliable the regression equation will be.
B. SEE is the standard deviation of the error terms around the regression line. As the sum of the residuals squared increases, holding all else constant, SEE should increase.
C. As the value for SEE increases, the correlation between the dependent and independent variable will decrease, holding all else constant.
Explanation: The higher the SEE value, the less reliable the regression equation will be. A good regression should have most observations lying close to the regression line. However, a high SEE implies that the observations are widely dispersed around the regression line. Consequently, the correlation coefficient will be low as well.

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