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Finance: What is r-squared? 0 Views
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Description:
What is r-squared? R-squared in financial applications applies to the percentage of a security’s or fund’s price movements that can be attributed to sympathetic movements by an index or other trackable benchmark. An R-Squared under 70% would be too divergent to consider the security or fund in question to have a correlation with an index. An R-Squared of 85% would indicate a sympathetic relationship with an index.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
Transcript
- 00:00
Finance allah shmoop what is r squared r squared It's
- 00:09
a measure of the personage of change in one variable
- 00:12
Do exclusively to changes in another variable Accidentally back into
- 00:17
a car in the lot and need someone to blame
- 00:20
it on late for work and need a scapegoat The
Full Transcript
- 00:22
boss will believe well r squared is here to find
- 00:25
you up patsy To take the blame for well pretty
- 00:28
much anything you can dream up well r squared won't
- 00:30
take the fall for you It will find the fall
- 00:33
guy best suited for that job So let's say we
- 00:35
looked at a set of by various or to variable
- 00:38
data that compares the top speed of remote control cars
- 00:42
to the size of the tires on the car which
- 00:45
end up having in our scored value of point seven
- 00:47
nine That means seventy nine percent of the changes in
- 00:50
the top speed of the car were due to changes
- 00:52
in the size of the tires More simply the changes
- 00:56
entire side are the primary cause then in changes in
- 00:59
the top speed and you'd say in normal english the
- 01:02
r squared between larger tires and faster speed was high
- 01:06
like point eight Other factors affect top speed like wind
- 01:09
resistance battery power and so on But change his entire
- 01:12
speech of the primary cause for changes in top speed
- 01:14
We need to be careful not to say that tire
- 01:16
size is the primary cause of top speed See that
- 01:19
was a little error there They just fill in You
- 01:21
are square doesn't tell us that It just tells us
- 01:24
that changes in the tire side are the primary cause
- 01:26
for changes in the top speed meaning they're just related
- 01:30
We don't know that one causes the other and the
- 01:32
difference is subtle But while hugely important here So let's
- 01:35
walk through how we might really work with r squared
- 01:38
from beginning to end in a problem What We've got
- 01:40
two variables like the daily price of a gallon gasoline
- 01:43
and the average number of gallons purchased per customer on
- 01:46
that same day It's not unreasonable to think that changes
- 01:49
in the price of gas or a factor in how
- 01:51
much gas people buy but how much of a factor
- 01:54
like a gallon of gasoline costs You know eighteen dollars
- 01:57
right there pete Fewer people buying instead of a god
- 01:59
three bucks So r squared will tell us how much
- 02:02
of the changes in how much people pump into their
- 02:04
tank is due to changes in the price of gas
- 02:07
And how much of those changes in the amount of
- 02:09
gas purchased is due to other factors like time of
- 02:12
season or the length of trip there taking or the
- 02:15
amount of money they happen to have on hand or
- 02:17
how loud the kids are screaming Are we there yet
- 02:20
Are we there yet in the back seat Yeah okay
- 02:22
well because we knew it would come in handy We
- 02:24
collected data from our local gas and sip on seven
- 02:27
different days Calculations like the coefficient of determination are squared
- 02:31
and or the correlation coefficient are should only be attempted
- 02:34
on data that has a linear ish shape It's always
- 02:38
a good idea to whip up a scatter plot of
- 02:39
the data just to make sure it's not obviously curved
- 02:42
or has some other weird non linear pattern that we
- 02:44
can't then generalize from Well the pattern here is linear
- 02:47
enough and doesn't show an obvious curve or other pattern
- 02:50
So we're good to go and we can calculate r
- 02:52
squared by hand but almost nobody does Even for a
- 02:54
very small data sets graphing calculator spreadsheets and web sites
- 02:57
dedicated to finding our and only r and r squared
- 03:00
Well all do a dandy job of getting us the
- 03:02
values we want So let's do that well after popping
- 03:05
this data into our jailbroken diamond plated solar powered voice
- 03:09
activated t I eighty four plus i'd any um edition
- 03:13
We get in our squared value of point one three
- 03:15
five eight right there What does that mean for us
- 03:17
And for our gas problem Well since r squared is
- 03:20
the percentage of change in the uae variable that is
- 03:22
do strictly to changes in the x variable It means
- 03:24
that on ly thirteen point five eight percent of changes
- 03:27
in the average amount of gas purchase are due to
- 03:29
changes in the price of gas It also means that
- 03:31
eighty six point four two percent of the changes in
- 03:33
the amount of gas purchase are due to other factors
- 03:36
like changes in how much money people have on hand
- 03:38
It could also have to do with well changes in
- 03:41
how far they're planning on driving That day could mean
- 03:43
many other things but it doesn't For now we're just
- 03:46
focused on the numbers And again we need to be
- 03:48
very careful not to claim that r squared number tells
- 03:51
us how much of a percentage cause one variable to
- 03:54
do another thing that's a no no r squared is
- 03:56
always an on ly the percentage of changes in one
- 04:00
variable do ooh to changes in the other Also weaken
- 04:02
Take r squared out back behind the wood shed and
- 04:05
square roots The mess out of it to get the
- 04:07
correlation coefficient are got it Okay Some important safety tips
- 04:11
We should only find r squared for data that have
- 04:13
a linear ish pattern We confined our squared by hand
- 04:17
but that's a sign of insanity So used tech to
- 04:19
do the grunt work for the actual calculations Well our
- 04:22
scores the percentage of change in one variable that is
- 04:24
do strictly to changes in another variable if we square
- 04:27
root are squared while we get the correlation coefficient are
- 04:30
positive number There never never ever suggest that ninety nine
- 04:33
percent of the changes in a police person's weight is
- 04:35
due to changes in doughnut consumption either just a extra 00:04:39.283 --> [endTime] free warning there from your friends at shmoop
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