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An analyst is trying to determine whether fund return performance is persistent. The analyst divides funds into three groups based on whether their return performance was in the top third (group 1), middle third (group 2), or bottom third (group 3) during the previous year. The manager then creates the following equation: R = a + b1D1 + b2D2 + b3D3 + ε, where R is return premium on the fund (the return minus the return on the S&P 500 benchmark) and Di is equal to 1 if the fund is in group i. Assuming no other information, this equation will suffer from: A. heteroskedasticity. B. serial correlation. C. multicollinearity. |