CFA Level 1: Understanding R-Square and Unexplained Variance

R-Square and Unexplained Variance

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Question

In a statistical regression estimation, the R-square is found to be 39% and the slope coefficient is -0.3. The percentage of variance of the dependent variable not explained equals ________.

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Explanations

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A. B. C. D.

B

The R-square of the regression measures the amount of variance of the dependent variable explained by the independent variable. This is given to be 39%.

Hence, the amount not explained equals 100% - 39% = 61%.