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John Paul, Level 3 Candidate, is interested in determining if the regression analysis he performed violates any of the assumptions of the linear...

John Paul, Level 3 Candidate, is interested in determining if the regression analysis he performed violates any of the assumptions of the linear model. He believes that he has uncovered an undervalued mutual fund, but wants to make sure his results were not biased because of heteroskedasticity.



John Paul regressed the squared residuals of the original regression against the returns on a well-diversified equity index. The results of which are shown below:






Regression Output:




Constant








0.00018

Std Err of Y Est








0.000209

R Squared








0.115441

No. of Observations





24

Degrees of Freedom





22












X Coefficient(s)





-0.003654056




Std Err of Coef.





0.002156488








John Paul tests for and shows the model suffers from heteroskedasticity. Discuss the implications for investing in this mutual fund.

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