FRM Part I · FRM Exam Part I · Regression Diagnostics
A regression has an explanatory variable whose VIF is 16. By what factor is the standard error of that variable's coefficient inflated relative to the case of no collinearity with the other regressors?
The standard error is inflated by a factor of 4. The VIF of 16 applies to the variance of the coefficient estimate, so the standard error rises by the square root of 16, which is 4. Saying 16 confuses variance with standard error.
- A16
- B8
- C4Correct
- D2
Explanation
VIF measures the inflation of the coefficient's variance. The standard error is inflated by the square root of VIF: sqrt(16) = 4. Check: 4² = 16. Answering 16 confuses variance inflation with standard error inflation.
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