CEA Quantitative Analysis and Econometrics 2

Question 1

In a multiple regression model, what does heteroscedasticity specifically refer to?

Accepted Answer

Non-constant variance of the error term across observations

Answer

Heteroscedasticity means the variance of the regression error term is not constant across all levels of the independent variables.

Question 2

A researcher finds that the Durbin-Watson statistic is approximately 0.5. This most likely indicates:

Accepted Answer

Positive serial correlation in residuals

Answer

A Durbin-Watson value close to 0 indicates strong positive autocorrelation, while values near 4 suggest negative autocorrelation, and values near 2 suggest no autocorrelation.

Question 3

Which transformation is most commonly used to linearize an exponential relationship of the form Y = ae^(bX)?

Accepted Answer

Natural log transformation of Y

Answer

Taking the natural log of both sides converts ln(Y) = ln(a) + bX, which is a linear relationship suitable for OLS estimation.

Question 4

In instrumental variable (IV) regression, a valid instrument must satisfy which two conditions?

Accepted Answer

Relevance and exogeneity

Answer

A valid instrument must be correlated with the endogenous regressor (relevance) and uncorrelated with the error term (exogeneity).

Question 5

The Variance Inflation Factor (VIF) of 10 for a predictor variable suggests:

Accepted Answer

Severe multicollinearity affecting that predictor's coefficient estimate

Answer

A VIF of 10 indicates that 90% of the variance of that predictor is explained by other predictors, signaling severe multicollinearity.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Quantitative Analysis and Econometrics 2