- CFA Exams
- CFA Exam: Level II 2021
- Study Session 2. Quantitative Methods (1)
- Reading 5. Multiple Regression
- Subject 13. Multicollinearity

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**CFA Practice Question**

When multicollinearity is present in a linear regression, which of the following is true?

II. The regression cannot be estimated.

III. The interpretation of the regression is problematic.

IV. The t-statistics will be too large.

I. The residuals will be serially correlated.

II. The regression cannot be estimated.

III. The interpretation of the regression is problematic.

IV. The t-statistics will be too large.

Correct Answer: III

The interpretation of the regression is problematic, but the regression can be estimated. The t-statistics may decrease substantially when multicollinearity is present, yet the r-squared may remain high.

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