Answer the question that I circle.

MFIN6201 - Empirical Techniques and Applications In Finance 15 MFIN62 The regression R2 is the fraction of the sample variance of Y; "explained" by the regression. The Calm Yi = Yitui = OLS prediction + OLS residual Var lyi) = Var( 9; tui) 3 = Var (tilt Varlu; ) + sample var (Y) = sample var(Y) + sample var(ui) (why?) -+ total sum of squares = "explained" SS + "residual"_SS Definition of R2: R2 = 435 ESS _ 21(1;-E(P))2 1 = Varcri varlu; ) Zi= 1 ( Yi -E (Y) ) 2 . R2 = 0 means ESS = 0 vari Yi) variYi) . R2 = 1 means ESS = TSS, 0