25. Which of Vasileva’s assumptions regarding regression analysis is incorrect?

A. Assumption 1 B. Assumption 2 C. Assumption 3

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Elena Vasileva recently joined Energy Invest as a junior portfolio analyst. Vasileva's supervisor asks her to evaluate a potential investment opportunity in Amtex, a multinational oil and gas corporation based in the United States. Vasileva's supervisor suggests using regression analysis to examine the relation between Amtex shares and returns on crude oil. Vasileva notes the following assumptions of regression analysis: Assumption 1 The error term is uncorrelated across observations. Assumption 2 The variance of the error term is the same for all observations. Assumption 3 The expected value of the error term is equal to the mean value of the dependent variable. Vasileva runs a regression of Amtex share returns on crude oil returns using the monthly data she collected. Selected data used in the regression are presented in Exhibit 1, and selected regression output is presented in Exhibit 2. Vasileva expects the crude oil return next month, Month 37, to be -0.01. She com- putes the variance of the prediction error to be 0.0022. EXHIBIT 1 Selected Data for Crude Oil Returns and Amtex Share Returns Predicted Oil Return Amtex (X) Return Amtex Regression Squared Cross-Product Return Residual Residual (Y) (X; -X) (Y,- V) () (V,-) (Y, -) Month 1 -0.032000 0.033145 -0.000388 0.002011 -0.031134 0.000969 Month 0.028636 0.062334 0.002663 0.016282 -0.046053 0.002121 36 Sum 0.085598 0.071475 Average -0.018056 0.005293