On the basis of regression Equation we can decompose the variability of the dollar value of the asset, Var(P), into two separate components.

Question

On the basis of regression Equation  we can decompose the variability of the dollar value of the asset, Var(P), into two separate components.

Quizplus · Accepted Answer

The regression equation given is for the simple linear regression model with one predictor variable. According to the decomposition of variance in this model, the total variability of the response variable (dollar value of the asset, Var(P)) can be split into two components: variance explained by the predictor variable (in this case, the stock price, Var(S)), and residual variance (unexplained by the predictor variable, Var(e)). Choice B correctly shows this decomposition as Var(P) = b² x Var(S) + Var(e). Choices A, C, and D are incorrect because they either mix up the terms or introduce additional variables that are not part of the regression equation. Choice E is incorrect because there is a valid answer among the given choices.

On the Basis of Regression Equation We Can Decompose