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Homework answers / question archive / Which of the following statements best describes what the R-squared of 52
Which of the following statements best describes what the R-squared of 52.6% in the regression that estimates the Beta for Goldman Sachs is telling you about the risk? Select one: a. 52.6% of the total risk in the firm is market risk b. 52.6% of the total risk in the firm can be diversified away c. None of the above d. 52.6% of the beta can be attributed to market risk e. 52.6% of the total risk in the firm is firm specific risk
The answer is option A.
R-Squared of 52.6% in the regression that estimates the beta of Goldman Sachs is telling that 52.6% of the total risk is market risk.
R-Squared is the coefficient of determination which is defined by the following formula.
Explained variation in the regression / Total variation in the regression.
Therefore, 52.6% of R-Squared explains that it is the explained proportion of market risk out of the total risk.
Option B is incorrect because it describes R-Squared as the total risk instead of the explained portion of market risk.
Option C is incorrect as option A gives the right answer.
Option D is incorrect as R-Squared measure of 52.6% is not the measure of beta rather it describes the explained proportion of market risk in the total risk.
Option E is incorrect as 52.6% of the total risk is not the specific risk rather it is a component which must be used to calculate the specific risk in an easier way.
