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CFA Level I · CFA Level I Exam · Applications of Simple Linear Regression in Finance

In a simple linear regression, the standard error of estimate is most likely:

The standard error of estimate measures how widely the observed values scatter around the fitted regression line, being the standard deviation of the residuals. A smaller value indicates a better fit. The explained proportion of variation is R-squared, a different measure.

  1. Aa measure of the dispersion of the residuals around the fitted regression lineCorrect
  2. Bthe proportion of total variation in the dependent variable that is explained
  3. Cthe standard deviation of the independent variable

Explanation

The standard error of estimate measures the typical distance of observed values of the dependent variable from the fitted line, in the units of that variable. The proportion of explained variation is R-squared. It has no direct link to the standard deviation of the independent variable.

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