- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 4. Introduction to Linear Regression
- Subject 8. Limitations of regression analysis

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**CFA Practice Question**

Which of the following statements least accurately describes the limitations associated with regression analysis?

A. Regression equations are based on sample data and thus are prone to large errors.

B. A discovery of a cause and effect through a regression may be exploited and thus eliminating that relationship.

C. If the regression assumptions are violated, the results of the regression outcome would be highly suspect.

**Explanation:**While regression equations may be based on sample data, and thus are prone to large "forecasting" errors, this cannot be regarded as a limitation of regression. While errors are expected to occur, we simply would like to make sure that they are random and that they average out to zero. Note this is true: Regression relations constructed using historic data may not hold in the future.

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**User Contributed Comments**
3

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

rhardin |
I thought that we were never to assume a cause and effect relationship from a regression, making B inaccurate as well. |

gregsob2 |
agree with rhardin |

theresa |
'maybe'. we cannot assume but most likely we will find such a relationship. Besides, A is more wrong. |