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Statistics Tutorial

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Adjusted R-Squared

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Statistics - Useful Resources

Statistics - Discussion

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R-squared measures the proportion of the variation in your dependent variable (Y) explained by your independent variables (X) for a linear
regression model. Adjusted R-squared adjusts the statistic based on the number of independent variables in the model.R2
shows how well terms (data points) fit a curve or line. Adjusted R2
also indicates how well terms fit a curve or line, but adjusts for the number of terms in a model. If you add more and more useless
variables to a model, adjusted r-squared will decrease. If you add more useful variables, adjusted r-squared will increase.

Adjusted R2adj
will always be less than or equal to R2
. You only need R2
when working with samples. In other words, R2
isn't necessary when you have data from an entire population.

Fm
oraul
(1 −R 2 ) (n −1 )
R2adj = 1− [ n −k−1 ]

Where −

n
= the number of points in your data sample.

k
= the number of independent regressors, i.e. the number of variables in your model, excluding the constant.

Example
Problem Statement:

A fund has a sample R-squared value close to 0.5 and it is doubtlessly offering higher risk adjusted returns with the sample size of 50 for 5
predictors. Find Adjusted R square value.

Solution:

Sample size = 50 Number of predictor = 5 Sample R - square = 0.5.Substitute the qualities in the equation,
( 1 − 0.52 ) ( 50 − 1 ) 49
R2adj = 1−[ 50 − 5 − 1
] = 1 − (0.75) × 44
, = 1 − 0.8352, = 0.1648

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