Financial Risk Manager Part 1
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Which of the following is NOT true regarding a scatter plot?
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NNikitesh
A
It’s a visual representation of the relationship between the explained variable and the independent/explanatory variable
B
It’s a standard two-dimensional graph where the values of the explained variable are plotted on the X-axis while those of the explanatory variable are plotted on the Y-axis
C
It reveals the kind of relationship between the explained variable and the explanatory variable - positive, negative, or linear.
D
None of the above
Explanation:
Explanation
Option B is NOT true regarding a scatter plot because it incorrectly describes the axis assignment. In a scatter plot:
- Correct axis assignment: The independent/explanatory variable (X) is plotted on the X-axis, while the dependent/explained variable (Y) is plotted on the Y-axis.
- What Option B states: It says "the values of the explained variable are plotted on the X-axis while those of the explanatory variable are plotted on the Y-axis" - this is exactly backwards.
Why the other options are correct:
- Option A: Correct - A scatter plot is indeed a visual representation of the relationship between the explained (dependent) variable and the independent/explanatory variable.
- Option C: Correct - Scatter plots reveal the nature of relationships (positive correlation, negative correlation, linear, non-linear, etc.).
- Option D: Incorrect because there IS a false statement among the options (B).
Key Concept: In regression analysis and scatter plots, the independent variable (predictor) goes on the X-axis, and the dependent variable (response) goes on the Y-axis. This convention allows us to visualize how changes in X affect Y.
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