Correlation and Regression – Question Bank www.ift.world
LO.a: Calculate and interpret a sample covariance and a sample correlation coefficient and
interpret a scatter plot.
1. Based on the scatter plots shown below, which of the following statements is most accurate?
Figure 1
Figure 2
Figure 3
A. Figure 1 shows a scatter plot of two variables with a correlation of -1.
B. Figure 2 shows a scatter plot of two variables with a correlation of -1. C. Figure 3
shows a scatter plot of two variables with a correlation of -1.
2. The following table gives the number of cars sold annually and interest rates in a country, for
four recent years. The sample correlation between car sales and interest rates is closest to:
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, Correlation and Regression – Question Bank www.ift.world
Year Cars Sold (in millions) Interest Rate (%)
2011 100 7.0
2012 140 6.0
2013 160 5.0
2014 120 6.0
A. 0.95.
B. 0.
C. -0.95.
3. Analyst 1: If two variables have a very strong linear relation, then the absolute value of their
correlation will be close to 1.
Analyst 2: If the correlation coefficient is positive, the two variables are directly related;
if the correlation coefficient is negative, the two variables are not related. A. Analyst 1 is
correct.
B. Analyst 2 is correct.
C. Both analysts are correct.
LO.b: Describe limitations to correlation analysis.
4. Which of the following statements is least accurate?
A. Two variables can have a strong nonlinear relation and still have a very low
correlation.
B. Correlation is a more reliable measure when outliers are present in the data series.
C. Correlation between two variables can arise not from a direct relation between them,
but from their relation to a third variable.
LO.c: Formulate a test of the hypothesis that the population correlation coefficient equals
zero and determine whether the hypothesis is rejected at a given level of significance.
5. The following table shows the sample correlations of the monthly returns for two different
mutual funds with the S&P 500. The correlations are based on 36 monthly observations. The
funds are as follows:
Fund 1: Small cap fund
Fund 2: Emerging equity fund.
S&P 500: US domestic stock index
S&P 500
Fund 1 0.32
Fund 2 0.36
S&P 500 1
Using a 5 percent significance level, which of the following conclusions is most accurate?
(Critical t-value for 34 df, using a 5 percent significance level and a two tailed test is 2.032)
A. Fund 1 is correlated to S&P 500.
B. Fund 2 is correlated to S&P 500.
C. Both funds are correlated to S&P 500.
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LO.a: Calculate and interpret a sample covariance and a sample correlation coefficient and
interpret a scatter plot.
1. Based on the scatter plots shown below, which of the following statements is most accurate?
Figure 1
Figure 2
Figure 3
A. Figure 1 shows a scatter plot of two variables with a correlation of -1.
B. Figure 2 shows a scatter plot of two variables with a correlation of -1. C. Figure 3
shows a scatter plot of two variables with a correlation of -1.
2. The following table gives the number of cars sold annually and interest rates in a country, for
four recent years. The sample correlation between car sales and interest rates is closest to:
Copyright © IFT. All rights reserved. Page 1
, Correlation and Regression – Question Bank www.ift.world
Year Cars Sold (in millions) Interest Rate (%)
2011 100 7.0
2012 140 6.0
2013 160 5.0
2014 120 6.0
A. 0.95.
B. 0.
C. -0.95.
3. Analyst 1: If two variables have a very strong linear relation, then the absolute value of their
correlation will be close to 1.
Analyst 2: If the correlation coefficient is positive, the two variables are directly related;
if the correlation coefficient is negative, the two variables are not related. A. Analyst 1 is
correct.
B. Analyst 2 is correct.
C. Both analysts are correct.
LO.b: Describe limitations to correlation analysis.
4. Which of the following statements is least accurate?
A. Two variables can have a strong nonlinear relation and still have a very low
correlation.
B. Correlation is a more reliable measure when outliers are present in the data series.
C. Correlation between two variables can arise not from a direct relation between them,
but from their relation to a third variable.
LO.c: Formulate a test of the hypothesis that the population correlation coefficient equals
zero and determine whether the hypothesis is rejected at a given level of significance.
5. The following table shows the sample correlations of the monthly returns for two different
mutual funds with the S&P 500. The correlations are based on 36 monthly observations. The
funds are as follows:
Fund 1: Small cap fund
Fund 2: Emerging equity fund.
S&P 500: US domestic stock index
S&P 500
Fund 1 0.32
Fund 2 0.36
S&P 500 1
Using a 5 percent significance level, which of the following conclusions is most accurate?
(Critical t-value for 34 df, using a 5 percent significance level and a two tailed test is 2.032)
A. Fund 1 is correlated to S&P 500.
B. Fund 2 is correlated to S&P 500.
C. Both funds are correlated to S&P 500.
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