CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

Which of the following statements is true with respect to the variance of the error terms?

I. If the variance of the error terms are constant throughout all the observations, then they are referred to being as homoskedastic.
II. If the variance of the error terms exhibit a correlation with the values of the independent variable, then the error terms are viewed as having unconditional heteroskedasticity.
III. If the variance of the error terms are neither constant nor correlated with the values of the independent variable, then the error terms are viewed as having conditional heteroskedasticity.
IV. A Chi-test should be used in order to determine if the error terms do in fact exhibit heteroskedasticity.
A. I and IV
B. I and III
C. II and IV
Explanation: II is incorrect because if the variance of the error terms exhibit a correlation with the values of the independent variable, then the error terms are viewed as having "conditional" heteroskedasticity.

III is incorrect because if the variance of the error terms is neither constant nor correlated with the values of the independent variable, then the error terms are viewed as having "unconditional" heteroskedasticity.

User Contributed Comments 2

User Comment
broadex Breusch -Pagan Test (1980) is the Chi-Test -used to test "conditional" heteroskedasticity.
pires100 IV is incorrect as well the as the Breusch-Pagan Test is the Chi-SQUARED test not the Chi-test. There is no correct answer.
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