Financial Risk Manager Part 1
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In which of the following scenarios would we expect to have a non-linear trend?
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NNikitesh
A
When a variable increases at a constant rate
B
When a variable increases at a decreasing rate
C
When the explanatory variable increases only at discrete intervals
D
When a linear trend has a negative regression slope
Explanation:
A non-linear trend occurs when the rate of change is not constant. Option B describes a variable increasing at a decreasing rate, which means the rate of increase is changing over time, making it non-linear.
Explanation:
- Option A (Incorrect): Constant rate of increase represents a linear trend.
- Option B (Correct): Decreasing rate of increase means the slope is changing, indicating a non-linear relationship.
- Option C (Incorrect): Discrete intervals don't necessarily imply non-linearity; a variable can increase at discrete intervals but still follow a linear pattern.
- Option D (Incorrect): A negative regression slope still represents a linear relationship, just with a negative constant rate of change.
Non-linear trends are characterized by changing rates of change, which can be visualized as curved patterns rather than straight lines in graphical representations.
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