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CMA Intermediate · Financial Management and Business Data Analytics · Data Analysis and Modelling

In a regression of the daily return of a mutual fund on the return of the Nifty 50 index, the coefficient of determination (R²) is 0.81. Which interpretation is correct?

An R² of 0.81 means 81% of the variation in the fund's return is explained by the variation in the Nifty return. It is the square of the correlation, not the correlation itself, and it is not the slope coefficient.

  1. A81% of the variation in the fund's return is explained by the variation in the Nifty returnCorrect
  2. BThe correlation coefficient between the two returns is 0.81
  3. CThe fund's return will change by 0.81% for every 1% change in Nifty
  4. D81% of the fund's predictions will be exactly correct

Explanation

R² measures the proportion of variation in the dependent variable explained by the independent variable. Here the correlation is √0.81 = 0.9 (in magnitude), so 0.81 is not the correlation. The slope (beta) is a separate parameter and is not given by R².

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