Hands-On Data Science with Anaconda

A model's performance measure

In this chapter, we looked at several applications of linear models, including CAPM, the Fama-French 3-factor linear model, the Fama-French-Carhart 4-factor linear model, and the Fama-French 5-factor linear model. Obviously, CAPM is the simplest one since it only involves a market index as the explanatory variable. One question remains though: which model is the best? In other words, how do we rank these models and how is their performance measured? When running linear regressions, the output will show both the R² and adjusted R². When comparing models with different numbers of independent variables, the adjusted R² is a better measure since it is adjusted by the number of input variables. However, note we should ...