# CFA Level 2 - Quantitative Methods Session 3 - Reading 12 Multiple Regression and Issues in Regression Analysis - LOS l

Categories: Economics

## CFA Level 2 - Quantitative Methods, Session 3 - Reading 12

### Multiple Regression and Issues in Regression Analysis - LOS l

#### (Practice Questions, Sample Questions)

1. An analyst is building a regression model which returns a qualitative dependant variable based on a probability distribution. This is least likely a:

A) probit model.
B) logit model.
C) discriminant model

Explanation — C: A probit model is a qualitative dependant variable which is based on a normal distribution. A logit model is a qualitative dependant variable which is based on the logistic distribution.

A discriminant model returns a qualitative dependant variable based on a linear relationship that can be used for ranking or classification into discrete states

2. Which of the following questions is least likely answered by using a qualitative dependent variable?

A) Based on the following company-specific financial ratios, will company ABC enter bankruptcy?
B) Based on the following executive-specific and company-specific variables, how many shares will be acquired through the exercise of executive stock options?
C) Based on the following subsidiary and competition variables, will company XYZ divest itself of a subsidiary?

Explanation — B: The number of shares can be a broad range of values and is, therefore, not considered a qualitative dependent variable.

Get quality help now
KarrieWrites
Verified writer

Proficient in: Economics

5 (339)

“ KarrieWrites did such a phenomenal job on this assignment! He completed it prior to its deadline and was thorough and informative. ”

+84 relevant experts are online

3. Which of the following is NOT a model that has a qualitative dependent variable?

A) Logit.
B) Event study.
C) Discriminant analysis

Explanation — B: An event study is the estimation of the abnormal returns--generally associated with an informational event—that take on quantitative values

4. A high-yield bond analyst is trying to develop an equation using financial ratios to estimate the probability of a company defaulting on its bonds.

Get to Know The Price Estimate For Your Paper
Topic
Number of pages
Email Invalid email

You won’t be charged yet!

Since the analyst is using data over different economic time periods, there is concern about whether the variance is constant over time. A technique that can be used to develop this equation is:

A) multiple linear regression adjusting for heteroskedasticity.
B) logit modeling.
C) dummy variable regression

Explanation — B: The only one of the possible answers that estimates a probability of a discrete outcome is logit modeling

5. What is the main difference between probit models and typical dummy variable models?

A) There is no difference--a probit model is simply a special case of a dummy variable regression.
B) Dummy variable regressions attempt to create an equation to classify items into one of two categories, while probit models estimate a probability.
C) A dummy variable represents a qualitative independent variable, while a probit model is used for estimating the probability of a qualitative dependent variable

Explanation — C: Dummy variables are used to represent a qualitative independent variable. Probit models are used to estimate the probability of occurrence for a qualitative dependent variable

Updated: Aug 04, 2023