- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 4. Introduction to Linear Regression
- Subject 2. Interpreting a regression coefficient

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**CFA Practice Question**

Which of the following are assumptions required to apply linear regression analysis?

II. The standard deviations of all the error distributions are the same.

III. The errors are statistically independent of each other.

IV. The deviations from the regression line are greater the further X is from its mean.

I. For a given value of X the error is a normally distributed random variable.

II. The standard deviations of all the error distributions are the same.

III. The errors are statistically independent of each other.

IV. The deviations from the regression line are greater the further X is from its mean.

A. I, II and III

B. II, III and IV

C. I, III and IV

**Explanation:**I. normality of the error distribution.

II. homoscedasticity (constant variance) of the errors.

III. independence of the errors (no serial correlation)

Assumption IV is incorrect. The deviations from the regression line should display no pattern.

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**User Contributed Comments**
3

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

chuong |
Asumption of linear regression model |

tim2 |
not sure III is quite right |

Paulvw |
The ERROR (not the Y value) is normally distributed random value, and for iii the ERROR terms (not the Y values) are statistically independent. |