FRM Part I · FRM Exam Part I · Linear Regression
In a simple linear regression of monthly excess returns of a fund on the market's excess returns, the total sum of squares (TSS) is 400 and the sum of squared residuals (SSR) is 100. What is the R-squared of the regression?
R-squared is 0.75. The explained sum of squares equals TSS minus SSR, which is 300, and dividing by TSS of 400 gives 0.75. The figure 0.25 is the unexplained proportion, SSR divided by TSS.
- A0.25
- B0.75Correct
- C0.80
- D1.33
Explanation
ESS = TSS - SSR = 400 - 100 = 300. R-squared = ESS/TSS = 300/400 = 0.75. The value 0.25 is SSR/TSS, which is the unexplained share, not the explained share.
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