Page 18 - FINAL CFA II SLIDES JUNE 2019 DAY 3

LOS 8.h: Distinguish between and interpret the READING 8: MULTIPLE REGRESSION AND ISSUES IN REGRESSION ANALYSIS
R and adjusted R in multiple regression.
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MODULE 8.4: COEFFICIENT OF DETERMINATION & ADJUSTED R-SQUARED

EXAMPLE: Calculating R and adjusted R An analyst runs a regression of monthly value-stock returns on five independent variables
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over 60 months. The total sum of squares for the regression is 460 (SST), and the sum of squared errors is 170 (SSE). Calculate the R and
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adjusted Ra .
The five independent variables together
explain 63% of the variation in monthly
value-stock returns.

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EXAMPLE: Interpreting adjusted R : Suppose the analyst now adds 4 more independent variables to the regression, and the
R increases to 65.0%. Identify which model the analyst would most likely prefer.
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Answer: With 9 independent variables, even though the R has increased from 63% to 65%, the adjusted R has decreased
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from 59.6% to 58.7%:
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Analyst would prefer the first because the adjusted R is higher and the model has 5 independent variables as opposed to 9 (all
else the same, the fewer independent variables, better the predictive accurate/power)