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CMA Final · Strategic Cost Management · Business Forecasting Models - Time Series and Regression Analysis

In a simple regression of sales on advertising, the correlation coefficient r is 0.8. What proportion of the variation in sales is NOT explained by advertising?

The unexplained proportion is 0.36. The coefficient of determination is r² = 0.8² = 0.64, so 64% of variation is explained by advertising and the remaining 1 - 0.64 = 0.36 is unexplained. Using 1 - r gives 0.20, which is incorrect.

  1. A0.20
  2. B0.36Correct
  3. C0.64
  4. D0.80

Explanation

Coefficient of determination r² = 0.64, so the explained variation is 64%. Unexplained = 1 - 0.64 = 0.36. Choosing 0.20 comes from 1 - r, which is the wrong measure.

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