CFA Practice Question

There are 208 practice questions for this study session.

CFA Practice Question

Which one(s) is (are) true?

I. Adjusted R2 can be negative.
II. If k > 5, R2 ≥ adjusted R2.
III. When an additional variable is added to a model, adjusted R2 can decrease.
A. II and III
B. I and III
C. I, II and III
Explanation: I. Adjusted R2 can actually be negative if the correlation between the dependent variable and the independent variables is sufficient low.
II. If k > 1, R2 ≥ adjusted R2.
III. When a new independent variable is added, adjusted R2 can decrease if adding that variable has only a small effect on R2. Mathematically, Although SSE will decrease when an extra explanatory variable is included, so will the term (n - K - 1). Thus the tem SSE/(n - K) can increase or decrease.

User Contributed Comments 7

User Comment
murli Simply, mid point of the middle most class
art1997 R-squared negative ??? nonsence
snider Adjusted R-square could be negative if the correlation between the dependent variable and the independent variables is sufficient low.
volkovv Adjusted R-square = 1-[(n-1)/(n-k-1)]*(1-R^2). If R^2 is very small, it is possible for adjusted R^2 to be negative.
simonjdp No, Since (n-1)/(n-k-1) will always be <= 1 for n,k >= 0 and since 1-R^2 will also always < 1, adjusted R^2 can never be negative. Do the math.
Ruan No... (n-1)/(n-k-1) will always be >=1, eg
n=9,k=2 then:

(9-1)/(9-2-1) = 1.333333, so yes a adj Rsq can be Negative
fanfanli Agree with Ruan but think of n=5 k=8 and you will see how it can be negative
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