Chapter 24 Building Regression Models
Which Explanatory Variables Belong in a Regression Model?
When the response is the return on a stock, the capital asset pricing model (CAPM, introduced in Chapter 21) has an answer. The regression ought to have just one explanatory variable: the percentage change in the value of the market. Alternative theories from finance provide different answers. These rivals specify a regression equation with additional explanatory variables. Whereas the CAPM says that it’s good enough to use returns ...
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