Howard Golub, CFA, is preparing to write a research report on Stellar Energy Corp. common stock. One of the world's largest companies, Stellar is in the business of refining and marketing oil. As part of his analysis, Golub wants to evaluate the sensitivity of the stock's returns to various economic factors. For example, a client recently asked Golub whether the price of Stellar Energy Corporation stock has tended to rise following increases in retail energy prices. Golub believes the association between the two variables to be negative, but he does not know the strength of the association.
Golub directs his assistant, Jill Batten, to study the relationships between Stellar monthly common stock returns versus the previous month's percent change in the US Consumer
Price Index for Energy (CPIENG), and Stellar monthly common stock returns versus the previous month's percent change in the US Producer Price Index for Crude Energy Materials (PPICEM). Golub wants Batten to run both a correlation and a linear regression analysis. In response, Batten compiles the summary statistics shown in Exhibit 1 for the 248 months between January 1980 and August 2000. All of the data are in decimal form, where 0.01 indicates a 1 percent return. Batten also runs a regression analysis using Stellar monthly returns as the dependent variable and the monthly change in CPIENG as the independent variable. Exhibit 2 displays the results of this regression model.

EXHIBIT 2 Regression Analysis with CPIENG
Regression Statistics
Multiple R...............................0.1452
R-squared...............................0.0211
Standard error of the estimate........0.0710
Observations...........................248

Based on Batten's regression model, the coefficient of determination indicates that:
A. Stellar's returns explain 2.11 percent of the variability in CPIENG.
B. Stellar's returns explain 14.52 percent of the variability in CPIENG.
C. Changes in CPIENG explain 2.11 percent of the variability in Stellar's returns.

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EXHIBIT 1 Descriptive Statistics Lagged Monthly Change Monthly Return Stellar Common Stock CPIENG PPICEM Mean 0.0042 0.0123 0.0023 Standard Deviation 0.0534 0.0717 0.0160 Covariance, Stellar vs. CPIENG -0.00017 F0.00048 Covariance, Stellar vs. PPICEM Covariance, CPIENG vs. PPICEM 0.00044 Correlation, Stellar vs. CPIENG -0.1452 Coefficients Standard Error -Statistic 0.0138 0.0046 3.0275 Intercept Slope coefficient -0.6486 0.2818 -2.3014