Question

Within a pensions and investments department, where do you see appropriate uses for regression analysis in understanding relationships between two variables and discuss some drawbacks you may see in using this tool?

Answer 1

So the work of the pensions and investment department is basically to invest the pension fund in mutual funds, stocks or other such financial instruments so as to generate time value of money and then to provide pensions to the people of that company or association. Pension basically depends on the employee working years, and the annual income of the employee. Out of these we are known the annual salary of the employee. So the two variables which can be related using regression is the initial salary of the employee at the start of his career, and the pension that he will get at the end of his career. Here salary is the independent variable, while pension is the dependent variable. So by using regression we can predict the pension that an employee will be getting.

Some drawbacks may be the outliers, some people may not follow the average growth, and achieve tremendous growth causing a high pension at the end of their tenure than what we predicted. Some people may loss their jobs due to various economic factprs like recession etc, in which case our model can fail as we haven't considered the effect of economic recession or market fall.