ACCA Performance Management (F5) Certification Practice Exam

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How does a high r-squared value affect confidence in the regression equation?

It decreases confidence in the model.
It indicates less reliability of predictions.
It signifies more confidence in the equation.
It suggests a random relationship between the variables.

The correct answer is: It signifies more confidence in the equation.

A high r-squared value indicates that a significant proportion of the variability in the dependent variable can be explained by the independent variables in the regression model. This suggests that the model fits the data well. When r-squared is close to 1, it demonstrates that there is a strong linear relationship between the independent and dependent variables, which reinforces confidence in the predictions made by the regression equation. This strong fit implies that using the regression equation for forecasting or inference is likely to yield reliable results, as the model is capturing the patterns in the data effectively. Therefore, a high r-squared value directly correlates with enhanced confidence in the accuracy and reliability of the regression outputs.