CFA Level I · CFA Level I Exam · Applications of Simple Linear Regression in Finance
In a simple linear regression of a stock's excess returns on the market's excess returns, the sum of squares total (SST) is 80 and the sum of squares regression (SSR) is 60. The coefficient of determination is most likely:
R-squared is 0.75. It is the sum of squares regression divided by the sum of squares total, 60 divided by 80. The figure 0.25 is the unexplained proportion, found from the sum of squared errors over total variation, so it is not the coefficient of determination.
- A0.25
- B0.75Correct
- C0.80
Explanation
R-squared equals explained variation divided by total variation: 60/80 = 0.75. The value 0.25 is the unexplained share (SSE/SST), which is the complement of R-squared. The value 0.80 has no basis in the data.
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