Mark Gardner, CFA, heads the investment research department of a wealth manageme

Question

Mark Gardner, CFA, heads the investment research department of a wealth management company. Gardner is an expert in statistical modelling and financial statement analysis. The CFO asked Gardner to analyze JQL Airlines from an investor's perspective. He reads through the company's financial reports and learns that fuel cost is a major component of its operating costs. He then tries to sdentify the factors that drive fuel prices. He bclieves that fuel prices are a function of the demand for fucl and describes the relationship with the follawing equation is fuel price (in USD per gallon) and D is the demand for fuel (in milthons of barrels per day, worldwide). b and by are the intercept and the slope cocfficients, respectively. .e is the error term. Gardner shares this result with a colleague, Travis Robert, who is also working on the same project. The modafied regression equation including refining costs, is given by Rohert includes one more independent variable in the regression, refining costs (in USD per gallom), denoted by R After Robert runs the regression, he obtains the following results Exhibit 1: Regression Result with Refining costs Multiple R R2 Adjusted R2 Standard Error 0.9178 0.9128 0.5902 36 ANOVA df Significance 24.0327 62.0164 184.23720 1.1082 03366 135.1409 Residual 3 Total 35 Intercept 54511 10309 Refining Costs 0.2877 24226 0.4612 Gardner asks Robert to test whether, as a group, the independent variables explain the dependent variahle. Which of the following tests should Robert use for Mark's request? B P-test CDurhin-Watson Test

Explanation / Answer

(B)F test compares the effectiveness of two models one (by eliminating the independent variables)with only the intercept and the other including the independent variables and the intercept.If the independent variables explain the variation in the dependent variable the second model will be more effective.

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