FRM Part I · FRM Exam Part I · Regression Diagnostics
In a multiple regression, the auxiliary regression of explanatory variable X1 on the other explanatory variables yields an R-squared of 0.90. What is the variance inflation factor (VIF) for X1?
The VIF is 10. It equals 1 divided by (1 minus the auxiliary regression R-squared), so 1/(1 - 0.90) = 1/0.10 = 10. This means the variance of the coefficient estimate is ten times larger than it would be with uncorrelated regressors.
- A1.11
- B5.00
- C10.00Correct
- D9.00
Explanation
VIF = 1/(1 - R²) = 1/(1 - 0.90) = 1/0.10 = 10. Check: 1/10 = 0.10 = 1 - 0.90. The value 9.00 results from mistakenly computing R²/(1 - R²) = 0.9/0.1, and 1.11 is 1/0.90, using R² instead of 1 - R².
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