- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 4. Introduction to Linear Regression
- Subject 6. The predicted value of the dependent variable

###
**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 |