CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

An economic researcher estimates the following regression between the annual income, I, of a family and the amount it spends on consumption goods, C:

C = 2,000 + 0.65 I + error term

If the R-square of the regression is just 0.3, estimate the amount that a family with an income of 50,000 will spend on consumption.
A. 2,000
B. 32,500
C. 34,500
Explanation: With the given regression, the amount that a family with an income of 50,000 will spend on consumption equals 2,000 + 0.65*50,000 = 34,500.

User Contributed Comments 5

User Comment
MGM13 So does this mean that the R-square of 0.3 is irrelevant to answering the question?
RNAN I agree with MGM13's implied point. It seemed as if they wanted us to choose D. to show that we saw how low the R-square number was and that this made the regression formula unusuable.
Smiley225 Not sure what they were getting at. I suppose if u compared to another model with a higher R-square then u could discard this model as it is not predictive. My 2c.
JimM R2 has nothing to do with calculating a predicted value with this model.
rodney176 Classic distraction information put in the question
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