Carter realizes that although regression analysis is a useful tool when analyzing investments, there are certain limitations. Carter made a list of points describing limitations that Smith Brothers equity traders should be aware of when applying her research to their investment decisions.
- Point 1: Data derived from regression analysis may be homoskedastic.
- Point 2: Data from regression relationships tends to exhibit parameter instability.
- Point 3: Results of regression analysis may exhibit autocorrelation.
- Point 4: The variance of the error term may change over time.
When reviewing Carter’s list, one of the Smith Brothers’ equity traders points out that not all of the points describe regression analysis limitations. Which of Carter’s points most accurately describes the limitations to regression analysis?
A. Points 1, 2, and 3.
B. Points 1, 3, and 4.
C. Points 2, 3, and 4.
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