Financial Risk Manager Part 1

Explanation

The coefficient of determination (R-squared) is a statistical measure that shows the proportion of the variance for a dependent variable that's explained by independent variables in a regression model.

Key Points:

• R-squared = 0.59 means that 59% of the total variation in the dependent variable is explained by the independent variables
• This indicates how well the independent variables collectively predict the dependent variable
• The remaining 41% of variation is unexplained and attributed to other factors

Why other options are incorrect:

• A: Incorrect - R-squared measures variation explained by independent variables, not the dependent variable
• B: Incorrect - Correlation coefficient and R-squared are different measures; correlation coefficient would be √0.59 ≈ 0.768
• C: Incorrect - High R-squared doesn't necessarily indicate multicollinearity among independent variables

Interpretation: In this multiple regression context with three independent variables, an R-squared of 0.59 indicates that the model explains 59% of the variability in the dependent variable, which is a moderately good fit.