- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 10. Simple Linear Regression
- Subject 2. Assumptions of the Simple Linear Regression Model

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**CFA Practice Question**

Examine the following residual by predicted plot. Which assumption is violated if we want to fit a linear regression model?

A. Linearity

B. Independence

C. Normality

D. Homoscedasticity

Correct Answer: D
This is an example of heteroscedasticity. It means that the variability in the response is changing as the predicted value increases. This is a problem, in part, because the observations with larger errors will have more pull or influence on the fitted model.

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