When Calculating the TSLS Standard Errors

question 9

Multiple Choice

When calculating the TSLS standard errors

• A)you do not have to worry about heteroskedasticity, since it was eliminated in the first stage
• B)you can use the standard errors reported by OLS estimation of the second stage regression.
• C)the critical values from the standard normal table should be adjusted for the proper degrees of freedom.
• D)you should use heteroskedasticity-robust standard errors.

---

Definitions:

Capital Budgeting

The process of evaluating and selecting long-term investments that are in line with the goal of shareholders' wealth maximization.

Time Value of Money

A financial principle that posits money available now is worth more than the same amount in the future due to its potential earning capacity.

Hurdle Rate

A financial metric indicating the minimum return on investment required for a project or investment to be considered acceptable.

Internal Rate of Return

A financial metric used to estimate the profitability of potential investments, calculating the discount rate that makes the net present value of all cash flows from the investment equal to zero.