As a Preliminary Step in the Selection of Variables to Use

question 100

Multiple Choice

As a preliminary step in the selection of variables to use in a statistical-forecasting model, the management accountant has calculated the coefficient of correlation between the firm's sales and three economic indexes. The results were as follows: $$\begin{array} { c c } \text { Index } & \text { Coefficient of Correlation } \\\text { A } & .105 \\\text { B } & - .009 \\\text { C } & - .854\end{array}$$ Which of the following statements indicates the best course of action for the auditor to take in the development of a forecasting model?

• A) Drop all three indexes from further consideration because a coefficient of correlation of + 1.0 is necessary for a statistically significant relationship.
• B) Include only indexes B and C in the model because they have the only negative coefficients of correlation.
• C) Include only index C in the model because its coefficient of correlation is relatively high and therefore probably statistically significant, while the coefficients of indexes A and B are likely to be insignificant.
• D) Include only index A in the model because it has the only positive coefficient of correlation.

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