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Judge how much of the variation in the explained variable a multiple regression captures, using ANOVA output and goodness-of-fit statistics

CFA® Level II · Quantitative Methods · Evaluating Regression Model Fit and Interpreting Model Results · L2.QM.2.a

The idea

The ANOVA table splits the total sum of squares into the part the regression explains (RSS) and the residual part (SSE). R² is RSS ÷ SST, but it never falls when a variable is added, so it flatters bigger models. Adjusted R² = 1 − [(n − 1) ÷ (n − k − 1)] × (1 − R²) penalises extra variables and can fall. The overall F-statistic is (RSS ÷ k) ÷ [SSE ÷ (n − k − 1)] and tests whether all slopes are zero together. To compare models, use the Akaike criterion for forecasting or the Schwarz Bayesian criterion for fit; lower is better. The usual slip is using n − k instead of n − k − 1.

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