Chartered Financial Analyst (CFA) Practice Exam Level 2

When faced with multi-collinearity problems, which statistical result indicates a concern?

1. T Test significant and F Test not significant

2. Both T and F Tests significant

3. F Test significant and T Test not significant

4. Both T and F Tests not significant

The correct answer is: F Test significant and T Test not significant

In the context of multi-collinearity, the concern typically arises when the independent variables in a regression model are highly correlated with each other. This can lead to unreliable estimates of the coefficients, inflated standard errors, and difficulties in determining the individual effect of each variable on the dependent variable. When the F Test is significant, it suggests that at least one of the predictors has a relationship with the dependent variable; however, if the T Tests for the individual coefficients are not significant, this indicates that none of the individual predictors can be confidently said to have a meaningful impact on the dependent variable when considering the presence of the other variables. This situation often arises due to multi-collinearity, as it can obscure the significance of individual predictors, even when the overall model indicates some relationship. Thus, this combination of a significant F Test and non-significant T Tests serves as a strong indicator of multi-collinearity issues within your regression model. The model suggests a collective effect of the independent variables but fails to demonstrate that any of them individually contributes to explaining the variation in the dependent variable effectively.