Embarking on the journey to becoming a Chartered Financial Analyst (CFA) is a significant undertaking, requiring dedication, diligence, and comprehensive preparation. For candidates aiming to conquer the Level 2 exam, this comprehensive study guide serves as an indispensable companion, offering a w...
R04 Introduction to Linear Regression 2020 Level II Notes
R04 Introduction to Linear Regression
1. Introduction...................................................................................................................................................................2
2. Linear Regression .......................................................................................................................................................2
2.1. Linear Regression with One Independent Variable ..........................................................................2
3. Assumptions of the Linear Regression Model...............................................................................................4
4. The Standard Error of Estimate ...........................................................................................................................5
5. The Coefficient of Determination ........................................................................................................................5
6. Hypothesis Testing .....................................................................................................................................................5
7. Analysis of Variance in a Regression with One Independent Variable .............................................7
8. Prediction Intervals ...................................................................................................................................................9
9. Limitations of Regression Analysis ................................................................................................................. 11
Summary ........................................................................................................................................................................... 12
This document should be read in conjunction with the corresponding reading in the 2020 Level II
CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright
2019, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights
reserved.
Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of
the products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are
trademarks owned by CFA Institute.
, R04 Introduction to Linear Regression 2020 Level II Notes
1. Introduction
Financial analysts often need to predict whether one variable X can be used to predict
another variable Y. Linear regression allows us to examine this relationship. This reading
covers regression analysis with a single independent variable, X1. In the next reading we will
cover regression analysis with multiple independent variables, X 1, X2, X3….
2. Linear Regression
2.1. Linear Regression with One Independent Variable
Linear regression assumes a linear relationship between the dependent and independent
variables. Regression analysis uses the historical relationship between the independent
variable and the dependent variable to predict the values of the dependent variable. The
regression equation is expressed as follows:
Yi = b0 + bi Xi + εi
where:
i = 1, …, n
Y = dependent variable
b0 = intercept
b1 = slope coefficient
X = independent variable
ε = error term
b0 and b1 are called the regression coefficients.
Dependent variable is the variable being predicted. It is denoted by Y in the equation. The
variable used to explain changes in the dependent variable is the independent variable. It is
denoted by X. The equation shows how much Y changes when X changes by one unit.
Say that we want to estimate the regression relation between the annual rate of inflation
(the dependent variable) and annual rate of money supply growth (the independent
variable) for six industrialized countries. The following table shows the data from these
countries from 1980 to 2016.
Country Money Supply Growth Rate (%) Inflation Rate (%)
Australia 10.68 4.14
Japan 4.00 0.32
South Korea 16.65 4.86
Switzerland 5.54 1.67
United Kingdom 11.81 4.10
United States 6.28 2.77
Average 9.16 2.98
The figure below demonstrates how linear regression works. It shows a scatter plot
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper sydneychongojr. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €6,34. Je zit daarna nergens aan vast.
