Adjusted R-Squared Formula, Equation, Definition

Adjusted R-Squared

Adjusted R Squared Definition:

Adjusted R-squared is nothing but the change of R-square that adjusts the number of terms in a model. Adjusted R square calculates the proportion of the variation in the dependent variable accounted by the explanatory variables.

Formula:

adjusted
Example :

A fund has a sample R-squared value close to 0.5 and it is most likely offering higher risk-adjusted returns with the sample size of 50 for 5 predictors.

Given,

Sample size = 50 Number of predictors = 5 Sample R -square = 0.5

To Find,

Adjusted R square value

Solution:

Substitute the values in the formula,

R2adjusted = 1 - ( 1 - 0.52)(50 - 1) / (50 - 5 -1)
= 1 - (0.75) x (49 / 44)
= 1 - 0.8352
= 0.1648

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