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Topic: Quantitative Methods for Finance - Is the following statements true or false? Explain the answer...

Topic: Quantitative Methods for Finance - Is the following statements true or false? Explain the answer briefly.

An increase in R2 after introducing a new explanatory variable does not say that the new variable is statistically significant.

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Answer #1

True,

By just looking at the R^2 number increasing we cannot claim that the new independent variable is good for the registration
because adding a new individual variable will always increase the R^2 but the independent variable might not be the perfect fit for the registration
To solve this problem we should use Adjusted R^2
till the time Adjusted R^2 is increasing the new independent variable is fine for the registration, but as the Adjusted R^2 decreases you should eliminate the independent variable.

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