The Internal Auditor of a Bank Has Developed a Multiple

The internal auditor of a bank has developed a multiple regression model which has been used for a number of years to estimate the amount of interest income from commercial loans. During the current year, the auditor applies the model and discovers that the R2 value has decreased dramatically, but that the model otherwise seems to be working correctly. Which of the following conclusions is justified by the change?

A) Changing to a cross-sectional regression analysis should cause the R2 to increase.
B) Regression analysis is no longer an appropriate technique to estimate interest income.
C) Some new factors, not included in the model, are causing interest income to change.
D) A linear regression analysis would increase the model's reliability.

Correct Answer:

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