Consider the Following to Answer the Question(s) Below

question 11

Multiple Choice

Consider the following to answer the question(s) below:
The average monthly residential mortgage lending rate in Canada is available monthly beginning in 1951. A scatterplot of the residuals against time for 747 months from January 1951 to March 2013 is shown below. The rate peaked in September of 1981 at 21.46%. The Durbin-Watson statistic has a value of D = 0.01.
-The critical values for the Durbin-Watson statistic for α = 0.05 and n = 750 are: dL= 1.87736 and dU = 1.88270. What does this tell us about the assumption of the independence of the errors?

• A) The assumption of independent errors is violated.
• B) The assumption of independent errors is not violated.
• C) The errors are not related to one another over time.
• D) Since D falls between the critical values, the test is inconclusive. So, we suppose that the errors are independent.
• E) As D is very small, the errors are independent.

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Definitions:

Annuity

A finance-related product that ensures a continual payment stream to a recipient, mainly used in planning for life after work.

Ordinary Annuity

Steady cash flows facilitated at the decline of each era during a certain season.

Nominal Interest

The rate of interest quoted on a loan or bond without adjusting for inflation or other factors that could affect the real rate of return.

Effective Rate

The actual interest rate on a loan or investment, taking into account the compounding of interest, as opposed to the nominal rate.