On the basis of regression Equation $P = a + b \times S + e$ we can decompose the variability of the dollar value of the asset,Var(P),into two separate components.

Question

Quizplus · Accepted Answer

The equation $\text{Var}(P) = b^2\text{Var}(S) + \text{Var}(e)$ states that the total variance of P can be decomposed into the variance explained by S (i.e. the relationship between P and S) and the variance not explained by S (i.e. the error term e). Therefore, the correct option is B which rearranges the equation in terms of variance of S.

On the Basis of Regression Equation P=a+b×S+eP = a + b \times S + eP=a+b×S+e

On the Basis of Regression Equation $P = a + b \times S + e$