Coefficient of determination, Financial Management

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Coefficient of Determination

As before,

2081_coefficient of determination.png

Where,

2095_coefficient of determination1.png

We can show that TSS = RSS + ESS

We can also show that

is an F distribution with k degrees of freedom in the numerator and n - (k + 1) degrees of freedom in the denominator.

Let us look at two extreme cases

The model is perfect.

This implies that ESS = 0 and F = ∞

The model does not exist.

This implies that RSS = 0 and F = 0

Intuitively, it should then be clear that if F is too small, the model should be rejected.

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