Question

What are some of the limitations of regression analysis?

Answer 1

• Rgression analysis is only limited to linear relationships. Example of linear relationship is interest rate and stock returns, movement of one variable will cause other variable to move
• Regression analysis is also affected by outliers. Outliers are those data points are are extremes in the sample, for example in a regression of stock returns average return ranges from 6% to 9%, there might be some stocks whose returns could be as high as 25% or as low as -30%, these are outliers which affect the regression analysis
• Different methods of regression analysis will produce different results and may distort the final decision. Example of different regression analysis methods are:- least squares method, optimization.