What Does a Low Value of R² Indicate When Performing

question 88

Multiple Choice

What does a low value of R² indicate when performing a linear regression of the relationship between changes in spot prices and changes in futures prices?

• A)It means the degree of confidence increases in the use of futures contracts,with a given hedge ratio estimate,to hedge cash asset-risk position.
• B)It means that we have little confidence that the slope coefficient from the regression is actually the true hedge ratio.
• C)It indicates that there is no statistical association at all between spot rates and future prices.
• D)It indicates that the regression line does not fit the scatter of observations.

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Definitions:

Factory Overhead

All indirect costs associated with manufacturing, apart from direct materials and direct labor costs.

Product Cost

The total cost associated with producing goods, including direct materials, direct labor, and manufacturing overhead.

Engine Oil

A lubricant used in internal combustion engines to reduce wear, protect against corrosion, and keep the engine clean.

Manufacturer

A company or person that makes goods for sale, especially on a large scale involving complex processes.