Key Assumption of Multiple Regression Analysis

Hard Multiple Regression Analysis Model Assumptions

In the context of multiple regression analysis, several assumptions underpin the validity of the model results. Consider a regression model that tries to predict the annual returns of a stock based on several economic indicators such as GDP growth, interest rates, and inflation. One crucial assumption is the relationship between the independent variables and the dependent variable.

Which of the following statements best describes a key assumption of multiple regression analysis regarding this relationship?

The relationship between the independent and dependent variables must be linear.

The residuals of the regression should be normally distributed regardless of the distribution of the independent variables.

Multicollinearity among independent variables should be high to ensure robustness of the model.

Hint

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