CMA Final · Strategic Cost Management · Business Forecasting Models - Time Series and Regression Analysis
In a simple regression of cost on activity, the coefficient of correlation r is −0.8. What is the coefficient of determination, and what does it mean?
The coefficient of determination is 0.64, found by squaring r = −0.8. It means 64% of the variation in cost is explained by activity. It cannot be negative, and 0.36 is the unexplained portion.
- A0.64; 64% of variation in cost is explained by activityCorrect
- B−0.64; cost falls as activity rises
- C0.80; 80% of variation is explained
- D0.36; 36% of variation is explained
Explanation
R² = (−0.8)² = 0.64, which is always non-negative. It means 64% of the variation in the dependent variable is explained by the regression on activity. Option 0.36 is the unexplained share (1−0.64).
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