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GARP Reading Chapter 8 - Page 126/127

The Intrepid

New Member
Not sure if i am missing something, but this seems to be contradictory.
1. Towards the end of page 126: "Adding a new variable to the model always increases the R2."
2. In the 2nd column on page 127: "As explained previously, adding an additional explanatory variable usually decreases R2 and can never increase it."

David - appreciate your help with this.

Thanks!
 

David Harper CFA FRM

David Harper CFA FRM
Staff member
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Hi @jimmykaw Good catch! BTW, do you happen to know why TSS' has an apostrophe in defining Adjusted R^2; ie, why TSS' rather than just TSS (at bottom of page 126 127) ... i haven't actually read GARP's Ch 8 yet ... ?

It appears that page 127 has a typo. Rather than:
"As explained previously, adding an additional explanatory variable usually decreases R2 and can never increase it. On the other hand, including additional explanatory variables (i.e., increasing k) always increases ξ. The adjusted R2 captures the tradeoff between increasing ξ and decreasing RSS as one considers larger models. If a model with additional explanatory variables produces a negligible decrease in the RSS when compared to a base model, then the loss of a degree of freedom produces a smaller R2." -- 2020 Financial Risk Management Part I: Quantitative Analysis, 10th Edition. Pearson Learning Solutions, 10/2019

I think should be as follows (notice I'm inserting "decreases RSS" because subsequent text is correct on that):
"As explained previously, adding an additional explanatory variable usually increases R2 (because it decreases RSS) and can never decrease it. On the other hand, including additional explanatory variables (i.e., increasing k) always increases ξ. The adjusted R2 captures the tradeoff between increasing ξ and decreasing RSS as one considers larger models. If a model with additional explanatory variables produces a negligible decrease in the RSS when compared to a base model, then the loss of a degree of freedom produces a smaller R2." -- 2020 Financial Risk Management Part I: Quantitative Analysis, 10th Edition. Pearson Learning Solutions, 10/2019

I'll share with GARP now ... thank you!
 
Last edited:

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
@jimmykaw right agree with your p 126 however at the bottom of my page 127, there is TSS' as shown:



sorry, i realized i gave you the wrong page number above, i meant p 127 re the TSS'
 
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