Assume That the Variance Depends on a Third Variable, Wi $\frac { 1 } { W _ { i } }$

question 16

Multiple Choice

Assume that the variance depends on a third variable, Wi, which does not appear in the regression function, and that var(u_i|X_i,W_i) = ?₀+?₁ $\frac { 1 } { W _ { i } }$ One way to estimate ?₀ and ?₁consistently is to regress

• A) \(\hat {\mathrm { u }}\) _i on \(w _ { i } ^ { 2 }\) using OLS
• B) \(\hat {\mathrm { u }}\) _i on \(\frac { 1 } { W _ { i } }\) using OLS
• C) \(\hat { u } _ { i } ^ { 2 }\) on \(\frac { X _ { i } } { W _ { i } }\) using OLS
• D) \(\hat { u } _ { i } ^ { 2 }\) on \(\frac { 1 } { W _ { i } }\) using OLS

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Definitions:

Horizontal Analysis

A technique in financial analysis that compares line items in financial statements over a series of periods.

Vertical Analysis

A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities, and equity) in a balance sheet is represented as a proportion of the total account.

Inventory Turnover

A measure of the liquidity of inventory; computed by dividing cost of goods sold by average inventory.

Liquidity

The ability of an asset to be quickly converted into cash or the ability of a company to meet its short-term financial obligations.