### CFA Practice Question

There are 208 practice questions for this study session.

### CFA Practice Question

Suppose data from a large corporation are used to estimate a regression model that explains the corporation's salary structure. The estimated equation is y-hatt = 35,000 + 3,000 xt1 + 6000 xt2 + 15,000 xt3 - 2000 xt4

where

• y-hatt = salary of individual t.
• xt1 = years of service of individual t.
• xt2 = 1 if highest degree is B.A for individual t, or 0 otherwise.
• xt3 = 1 if individual has master's or Ph.D., or 0 otherwise.
• xt4 = 1 if individual is a female, or 0 if individual is male.

Question 1: Suppose a female Ph.D. has been employed for 4 years. Predict her salary.
Question 2: Suppose a male with no college degree has been employed 5 years. Predict his salary.
Question 3: Suppose a new male recruit who has a B.A. is hired. Predict his salary.
Question 4: How would these coefficients change if we let xt4 be 1 for a male and 0 otherwise.
Correct Answer: Q1: 35,000 + 3,000 x 4 + 6,000 x 0 + 15,000 x 1 - 2,000 = 60,000.
Q2: 35,000 + 3,000 x 5 + 6,000 x 0 + 15,000 x 0 - 2,000 x 0 = 50,000.
Q3: 35,000 + 3,000 x 0 + 6,000 x 1 + 3,000 x 0 - 2,000 x 0 = 41,000.
Q4: The coefficient xt4 would change from -2,000 to +2,000. The intercept would decrease to 33,000.