- CFA Exams
- CFA Exam: Level II 2021
- 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**

We are interested in finding the linear relation between the number of widgets purchased at one time and the cost per widget. The following data has been obtained:

B. this is obvious nonsense. The regression line must be incorrect.

C. this is obvious nonsense. This reminds us that predicting Y outside the range of X values in our data is a very poor practice.

Suppose the regression line is YHAT = -2.5X + 60. We compute the average price per widget if 30 are purchased and observe YHAT = -15 dollars:

A. obviously we are mistaken; the prediction YHAT is actually +15 dollars.

B. this is obvious nonsense. The regression line must be incorrect.

C. this is obvious nonsense. This reminds us that predicting Y outside the range of X values in our data is a very poor practice.

Correct Answer: C

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**User Contributed Comments**
5

User |
Comment |
---|---|

LondonBoy |
-15 dollars means the supplier will be paying us to take the goods! |

danlan2 |
Good question. It is nonsense in real life. |

business |
why not b |

SMcalister |
@business, I think it's because the regression line is correct for the set of data that we're given. It describe the relationship between X=1 and X=15 quite well in fact. The real problem is that this we're trying to use a linear regression for something that's not going to be linear when it gets closer to zero |

birdperson |
@business the regression is fine, the user of the regression line outside of the range of x that was used to form the regression is full of nonsense |