CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

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

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.

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.
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