Exhibit 17

question 108

Essay

Exhibit 17.8.A realtor wants to predict and compare the prices of homes in three neighboring locations.She considers the following linear models:
Model A: Price = β₀ + β₁Size + β₂Age + ε,
Model B: Price = β₀ + β₁Size + β₂Loc1 + β₃Loc2 + ε,
Model C: Price = β₀ + β₁Size + β₂Age + β₃Loc1 + β₄Loc2 + ε,
where,
Price = the price of a home (in $thousands),
Size = the square footage (in square feet),
Loc1 = a dummy variable taking on 1 for Location 1,and 0 otherwise,
Loc2 = a dummy variable taking on 1 for Location 2,and 0 otherwise.
After collecting data on 52 sales and applying regression,her findings were summarized in the following table. Note: The values of relevant test statistics are shown in parentheses below the estimated coefficients.
Refer to Exhibit 17.8.Which of the three models would you choose to make the predictions of the home prices?

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Definitions:

Negatively Correlated

Negatively correlated refers to two variables moving in opposite directions; as one increases, the other decreases, and vice versa.

Standard Deviations of Returns

A measure of the volatility or risk associated with the return on investment, indicating how much the returns can fluctuate over a period.

Positive Correlation

A relationship between two variables where they move in the same direction, meaning as one variable increases, the other does too.

Risk

The potential for financial loss or gain in an investment due to various factors including market volatility.