CFA Level II ExamQuantitative MethodsEasy
A financial analyst is examining the relationship between a company's marketing expenditure (in $ millions) and its quarterly sales (in $ millions). The analyst performs a simple linear regression and obtains the following results: Sales = 1.5 + 2.3 * Marketing Expenditure Standard Error of the slope coefficient = 0.5 If the marketing expenditure for the next quarter is projected to be $10 million, what is the predicted quarterly sales (in $ millions)?
- A24.5
- B23.0
- C11.5
- D26.0
Show answer & explanationAnswer & explanation
Correct answer: A. 24.5
To predict quarterly sales, substitute the projected marketing expenditure into the regression equation. The standard error of the slope is not needed for a point prediction.
Why the other options are wrong
- B. This value would be obtained by only multiplying the marketing expenditure by the slope, omitting the intercept.
- C. This value would be obtained if the intercept was used as the multiplier for marketing expenditure, which is incorrect.
- D. This value is incorrect and does not follow from the provided regression equation.
Simple Linear Regression Prediction
Using a fitted simple linear regression model to estimate the dependent variable's value for a given independent variable's value.
- The prediction is a point estimate.
- It uses the estimated intercept and slope coefficients.
- The formula is Ŷ = b₀ + b₁X.
Memory trick: Plug in the X, get the Y hat!