CFA Level II ExamQuantitative MethodsEasy
A financial analyst is examining the relationship between a company's advertising expenditure (independent variable) and its quarterly sales (dependent variable). The analyst performs a simple linear regression and obtains the following results: * Intercept = 500 (in thousands of dollars) * Slope coefficient = 2.5 * R-squared = 0.75 * Standard error of the estimate = 50 If the company plans to spend $100,000 on advertising in the next quarter, what is the predicted quarterly sales (in thousands of dollars)?
- A1250
- B500
- C750
- D250
Show answer & explanationAnswer & explanation
Correct answer: C. 750
The predicted quarterly sales can be calculated using the simple linear regression equation: Predicted Sales = Intercept + (Slope * Advertising Expenditure). Plugging in the given values yields the correct prediction.
Why the other options are wrong
- A. This would be the result if the intercept was multiplied by the slope and then added to the advertising expenditure, or another calculation error.
- B. This is simply the intercept, ignoring the effect of advertising expenditure.
- D. This would be the result if only the advertising expenditure was multiplied by the slope, ignoring the intercept, or if the intercept was subtracted.
Simple Linear Regression Prediction
Simple linear regression models the relationship between a dependent variable and one independent variable using a linear equation, which can then be used to predict values.
- Equation: Y_hat = b0 + b1*X
- b0 is the intercept, b1 is the slope coefficient
- X is the independent variable, Y_hat is the predicted dependent variable
Memory trick: Predicting Sales with a Simple Line