On the basis of regression equation P = a + b × S + e,we can decompose the variability of the dollar value of the asset,VAR(P),into two separate components:

Question

Quizplus · Accepted Answer

The regression equation P = a + b × S + e explains the variability in P as a function of S and the error term e. Therefore, the variability in P can be decomposed into two components: the variability explained by S (i.e., b²^×VAR(S)), and the variability unexplained by S (i.e., VAR(e)). The option B correctly states this decomposition. Options A and D are not correct as they only consider the variability explained by S. Option C is not correct as it combines the covariance terms of P and S with the covariance term of S and e, which is not a valid decomposition of the variability in P.

On the Basis of Regression Equation P = a