When Selecting Explanatory Variables to Include in a Regression

question 27

Multiple Choice

When selecting explanatory variables to include in a regression,

• A)you should pick all observable variables available.
• B)you should pick all observable variables that are likely to have a meaningful impact on the dependent variable.
• C)ignore all variables that have t-statistics less than the critical value.
• D)ignore variables that have an R² less than 1.

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Definitions:

Standard Deviation

A measure of the dispersion or variability of a set of data points relative to their mean, used to gauge the amount of variation or spread in a distribution.

Risk Premium

The additional return over the risk-free rate demanded by investors for taking on a higher level of risk.

Beta

A measure of a security's volatility in relation to the overall market; a beta above 1 indicates higher than market average volatility.

Risk-Free Rate

The expected return on an investment that carries no risk, frequently indicated by government bond yields.