CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

When we ignore heteroskedasticity, we tend to

A. find significant relationships when there is none.
B. find no significant relationships when there is one.
C. find no significant relationships when there is none.
Correct Answer: A

When we ignore heteroskedasticity, the t-statistics will be larger than it should be, making us believe that there is a significant relationship when none exists.

User Contributed Comments 2

User Comment
nsmwaura Type 1 error...reject the null hypothesis while its true
quanttrader heteroskedasticity implies more distrib amongst the error term -- ie std error increases, hence t value will increase causing us to reject the null when it may indeed be true (ie type 1 error-- falsely assuming a sign relationship)
You need to log in first to add your comment.