Explanation:
Heteroskedasticity exists if the variance of the residuals is not constant. In a heteroskedastic regression, the t-statistics will be incorrectly calculated using ordinary least squares methods.
(Book 2, Module 20.1, LO 20.a)
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Question 25
An asset manager examines a single-factor regression for a hedge fund and makes the following two statements:
Statement 1: Heteroskedasticity exists if the regression residuals are correlated with their lagged values.
Statement 2: Heteroskedasticity causes the t-statistics of the regression to be incorrectly calculated using ordinary least squares methods.
Which of the manager's claims are correct?
A
Statement 1 is correct and Statement 2 is correct.
B
Statement 1 is correct and Statement 2 is incorrect.
C
Statement 1 is incorrect and Statement 2 is correct.
D
Statement 1 is incorrect and Statement 2 is incorrect.
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