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 multicollinearity?

I. Multicollinearity occurs when the dependent variable is highly correlated with one or two of the independent variables.
II. Multicollinearity may be identified in a regression model if its coefficient of determination is high yet all its coefficients are found to be insignificant.
III. The best way to correct for multicollinearity in a regression model is to include other independent variables into the model.
IV. Multicollinearity will result in regression coefficients to exhibit low t-scores.
A. I and II
B. II and III
C. II and IV
Explanation: I is incorrect because multicollinearity refers to the situation where two or more of the independent variables are highly correlated with each other.

III is incorrect because the fact is that the best way to correct for multicollinearity in a regression model is to eliminate the independent variables that exhibit a high correlation with the other independent variables.

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