Chartered Financial Analyst Level 1

Chartered Financial Analyst Level 1

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Which of the following is an underlying assumption of the simple linear regression model? The regression residuals:



Explanation:

Explanation

Correct Answer: A

One of the key assumptions of the simple linear regression model is that the regression residuals are normally distributed. This normality assumption is essential for conducting valid hypothesis tests and constructing confidence intervals based on the regression results.

Incorrect Answers:

  • B: The assumption of independence in simple linear regression implies that the residuals are uncorrelated across observations. High correlation among residuals would violate this assumption.

  • C: The assumption of homoskedasticity requires that the variance of the residuals is constant across all observations. Varying variances (heteroskedasticity) would violate this assumption.

Understanding these assumptions is critical for interpreting regression results and diagnosing potential violations through residual plots.