PLEASE ALL OF THE 10 QUESTIONS LISTED BELOW AND EMAIL YOUR

ANSWER
TO temesgen.worku@aau.edu.et
DEADLINE: BEFORE AUGUST 8, 2020 5:00 PM (11:00 LOCAL TIME)

1. What is the difference between regression and correlation?

2. Do you think that in the presence of heteroscedasticity OLS estimators are biased as well
as inefficient? Why?
3. Why do we use hypothesis testing in linear regression?
4. Do you think that if heteroscedasticity is present, the conventional t and F tests are invalid?
Why?
5. Do you think that in the presence of heteroscedasticity the usual OLS method always
overestimates the standard errors of estimators? Why?
6. Regression of y on x yielded R = 0.16. What can you say about the correlation between y and
x?
7. Referring to Question 6, what is the direction of correlation (positive or negative)?
8. Referring to Question 6, you computed the least squares residuals from the model. You then
regressed the residuals on x (i.e., residual is dependent and x is independent variable) and got
R= 0. Is this surprising? Defend your answer.
9. Note that in the regression model stated in Question 6, y is the dependent variable, and x is the
independent variable. Suppose you changed the roles of the two variables and ran the reverse
regression of x on y, using the same data. You obtained R= 0.16. Is this surprising? Defend your
answer.
10. The OLS slope estimators cannot be calculated when two of the independent variables in the
model (𝑋 and 𝑋) are correlated. Do you agree? Explain
 1. What is the difference between Regression and correlation?
 Regression allows for prediction, but correlation can only look at degree of relationship
between two variables.
 The main difference between correlation and regression is that in correlation, you sample
both measurement variables randomly from a population, while in regression you choose
the values of the independent(X) variable.
 Regression describes how an independent variable is numerically related to the dependent
variable. Correlation is used to represent the linear relationship between two variables.
On the contrary, regression is used to fit the best line and estimate one variable on basis
of another variable.
 Correlation is described as the analysis which lets us know the association between two
variables ‘X’ and ‘Y’. On the other hand, regression predicts the value of the dependent
variable based on the known value of independent variable, assuming that average
mathematical relationship between two or more variables.
 Regression describes how an independent variable is numerically related to the dependent
variable. Correlation is used to represent the strength or degree of linear relationship
between two variables.
 Regression analyses try to estimate or predict the average value of one variable
(dependent variable) on the basis of the fixed values of other variables.
2. Do you think that in the presence of heteroscedasticity OLS estimators are biased as
well as inefficient? Why?
NO; In the presence of heteroscedasticity OLS estimators are unbiased and efficient.

 Because heteroscedasticity exists implies that the error terms or disturbances in

regression model do not have a constant variance. It violates the classical linear model
assumptions which are required to satisfy the blue property estimators. However, it does
not affect the unbiasedness and consistency properties of OLS estimators but the
estimators do not have minimum variance or efficiency.
 3. Why do we use hypothesis testing in linear regression?

 Hypothesis testing in linear regression can be carried out if it can be assumed that the
random error term, is normally and independently distributed with a mean of zero and
variance of t-Test.
 The tests are used to conduct hypothesis tests on the regression coefficients obtained in
simple linear regression. A statistics based on the distribution is used to test the two-side
hypothesis that the true slope equals some constant value.
 We wish to test hypothesis whether the slope equals a constant β 1,0
H0 : β1 = β1,0
H1: β1 ≠ β1,0

4. Do you think that if heteroscedasticity is present, the conventional t and F tests are
invalid? Why?
Yes; If heteroscedasticity is present, the conventional t and F tests are invalid.
 Because, In the presence of heteroscedasticity, the variance of OLS estimator changes
and is larger than in the absence of heteroscedasticity implies the conventional t and F
test measures will be insignificant and do not give valid results.
 The t and F test measures vary inversely with variance hence if variance increase due to
heteroscedasticity then the t or F values will be smaller than usual and give insignificant
conclusions.

5. Do you think that in the presence of heteroscedasticity the usual OLS method always
overestimates the standard errors of estimators? Why?
NO;

 Because; if heteroscedasticity exist in the regression model then the variance of the estimator will
be an overestimation of the variance in its absence as it depends on the relationship between the
variance and the explanatory variable.
 The bias can be positive or negative. Hence, it cannot to asserted that it is always and
overestimation of the standard error of estimators.