Skip to content

FRM Part I · FRM Exam Part I · Regression Diagnostics

A plot of residuals against fitted values from a regression on monthly data shows a funnel shape that widens at higher fitted values. Which remedy is most appropriate while keeping the original model specification?

A widening funnel in the residual plot signals heteroskedasticity, so the appropriate remedy is to use heteroskedasticity-consistent robust standard errors, which restore valid inference while keeping the same model. Removing the intercept, duplicating data or relying on R² would not fix the problem.

  1. ADrop the intercept from the regression
  2. BUse heteroskedasticity-consistent (robust) standard errors for inferenceCorrect
  3. CIncrease the sample size by duplicating observations
  4. DReplace the t-test with the R² for judging significance

Explanation

A widening funnel indicates heteroskedasticity. Robust standard errors correct inference without changing the model. Dropping the intercept does not address non-constant variance, duplicating data is invalid, and R² is not a significance test.

Did you get it right without looking?

One question tells you little. A timed set on Regression Diagnostics shows your real accuracy, how long you take and where you lose marks.

Practise Regression DiagnosticsFree diagnostic mock

More Regression Diagnostics questions