Page 43 - FINAL CFA II SLIDES JUNE 2019 DAY 2

LOS 8.h: Distinguish between and interpret the READING 8: MULTIPLE REGRESSION AND ISSUES IN REGRESSION ANALYSIS
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R and adjusted R in multiple regression.
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
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variables over 60 months. The total sum of squares for the regression is 460, and the sum of squared errors is 170. Calculate
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the R and adjusted R .

The R of 63% suggests that the five independent variables
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together explain 63% of the variation in monthly value-stock
returns.

EXAMPLE: Interpreting adjusted R 2
Suppose the analyst now adds four more independent variables to the regression, and the R increases to 65.0%. Identify which
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model the analyst would most likely prefer.

Answer:
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With nine independent variables, even though the R has increased from 63% to 65%, the adjusted R has decreased from
59.6% to 58.7%:

The analyst would prefer the first model because
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the adjusted R is higher and the model has 5
independent variables as opposed to 9.