- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 10. Simple Linear Regression
- Subject 5. Prediction Using Simple Linear Regression and Prediction Intervals
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 |