Hi Guys,
First of all - this is my first post so I'd like to take this opportunity to thank you for everything I've learned from you so far.
I've got a question in the scope of statistical analysis of stocks and indices.
How would you interpret having low R-squared values for most of the companies in a given sector combined with having betas below 1? I know this is mostly theoretical, I'm just looking for any possible explanations.
Thanks, Paul
| +189 | Americas M&A League Table Q2 Updated | 75 | 15h |
| +141 | New Article: Dramatic Slide as UBS #22 (US) & New Leadership Desperately Needed | 36 | 6h |
| +118 | Restructuring: Anti-climactic Experience | 31 | 8h |
| +86 | IB Net Worth / Savings Check | 38 | 3h |
| +75 | A COMPLETE GUIDE TO SUMMER INTERNSHIP RECRUITING | 12 | 2d |
| +51 | Boutique firm wants access to my LinkedIn? | 40 | 1d |
| +48 | Woman who emptied Knicks trashcan on street then stole it was DEI exec, worked at JPMorgan Chase | 12 | 11h |
| +40 | Investment Banking is Hard | 17 | 1d |
| +31 | PWP vs BofA | 24 | 4h |
| +30 | AI + Financial Modelling | 7 | 1h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Low R-squared means that the model is not good at explaining the stock's returns. More generally, it likely means that the stocks you are looking at are highly impacted by unsystematic risk.
Assuming you are using a standard OLS regression, R-squared is the explained sum of square differences over total sum of square differences:
R^2=ESS/TSS
Like unfriend said, this means that your explanatory variables are not controlling for much of the variance in the stock. I don't think this really has any bearing whatsoever on what the coefficient on beta is; you should be looking at the standard error on beta and considering the corresponding p-value. If this shows your coefficient to be significant then a low beta obviously means that the stock has a lower systematic risk. Importantly, this says nothing about idiosyncratic risk - this could also be low.
Both above posters are correct
All right, I think I've got this - I run some p-value calculations and betas turned out to be statistically significant throughout the whole sample.
Thanks for your quick responses guys!
R squared is correlation, low R squared means its not correlated. Number is typically in a decimal that you can convert into a percentage. There are excel functions ( I think CORREL) for these.
Dolore vel eius consequatur odit nobis quia nisi. Corrupti dolorum ducimus quisquam neque. Ut labore amet fugiat et accusamus.
Aspernatur sunt eum sunt quis. Voluptas eveniet cum est vitae quo incidunt. Quisquam tempore perferendis eaque. Quod unde reprehenderit aut quia fugit aliquam dolorem.
Fugiat eos velit pariatur non sunt ut voluptatem. Non at temporibus voluptas. Dignissimos beatae et ut commodi sequi nobis error amet. Dolorum cumque veritatis repudiandae assumenda ut omnis. Ut nulla provident et natus debitis nobis. Quis aut rerum dolor quae repellendus magni non in. Quis nesciunt quis sint rerum omnis rem et tempore.
Consectetur ea sit natus optio tempora. Quo animi molestiae repellat eum esse ea.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...