CFA L2: Quants - Multiple Regression and Coefficient of Determination (R-Squared)

This lesson is part 9 of 17 in the course Quantitative Methods

For a multiple regression model, this value represents the percentage of total variation in Y that is explained by the regression equation.
The value is between 0 and 1.
R-squared has a mathematical relationship with TSS, SSE, and RSS.
R² = RSS/TSS = (TSS-SSE)/TSS = 1- (SSE/TSS)
The coefficient of determination alone does not indicate that a model is well specified, for example you could have more independent variables than necessary and the R² will still be high – in this case your model would be not be considered parsimonious.
Adjusted R² = an alternate measure and will always be smaller than R²