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Simple formula for calculating R-Squared between 2 stocks
Posted on 2016-08-19
Hello Experts, I'm a Delphi programmer writing a bit of a financial analysis program for myself and I'm having trouble with the calculation of R-Squared between the daily closing prices of 2 financial instruments. I thought I found a good formula on the net for doing it, but it doesn't yield sensible results. I'm no advanced statistics experts, but doesn't R-Squared have to be a value between 0 and 1? The formula I used yields values like 7.11 and 10.67... not making much sense. Here is the formula:
RSquared = (Covariance (x,y) * Covariance (x,y)) / (Variance(x) * Variance(y))
Could anyone offer any help please?
Thanks!
Shawn
RSquared = (Covariance (x,y) * Covariance (x,y)) / (Variance(x) * Variance(y))
Could anyone offer any help please?
Thanks!
Shawn
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8 Comments
Active today
Well, some definitions would put the correlation coefficient "r" in the range from -1 > +1.
So, yes, r squared would be in the range 0 > +1.
This much tracks.
If your "formula" yields other values then one would have to know the formula and the data being put into it wouldn't one?
So, yes, r squared would be in the range 0 > +1.
This much tracks.
If your "formula" yields other values then one would have to know the formula and the data being put into it wouldn't one?
Thanks Fred, yes I've come across that too on the net that the r-squared is no more than the Correlation Coefficient squared. That's simple enough - I'm already calculation correctly the Correlation Coefficient... but on some sites it describes r-squared differently and gives a different calculation. It's said that r-squared indicates of the "reliability" of the correlation coefficient... but to me, simply taking the CorrCoef and squaring it doesn't really offer any more insight. So I guess I'm just a little confused...
Thanks
Shawn
P.S: I'm not sure what you mean by "This much tracks"...?
Thanks
Shawn
P.S: I'm not sure what you mean by "This much tracks"...?
Active today
I meant by "this much tracks" is that we agree on terms as I've re-stated them.
But how in the world do you get the numbers you get? You haven't revealed the expressions being used. That does *not* track.
But how in the world do you get the numbers you get? You haven't revealed the expressions being used. That does *not* track.
Well Fred, googling around some time ago, here was a formula for RSquared I found in a financial analyiss article - so I figured it was what I wanted:
StockRsquared := Sqr(Covariance(x,y)) / ( Sqr(StdDev(x)) * Sqr(StdDev(y)));
That's the one that yielded the crazy numbers. But really - if RSquared is nothing more than Correlation Coefficient (...which I'm already calculating) squared, then I don't think I'm going to bang my head against the wall about this any more!
Thanks
Shawn
StockRsquared := Sqr(Covariance(x,y)) / ( Sqr(StdDev(x)) * Sqr(StdDev(y)));
That's the one that yielded the crazy numbers. But really - if RSquared is nothing more than Correlation Coefficient (...which I'm already calculating) squared, then I don't think I'm going to bang my head against the wall about this any more!
Thanks
Shawn
Active today
Then I guess we might look at some real numbers because the correlation coefficient can't be greater than 1.0 in magnitude. I don't see anything wrong with the expressions.
While it may seem a bit simplisitic: Here is a web page where one can calculate some cases and envision how it should go;
http://www.socscistatistics.com/tests/pearson/Default2.aspx
While it may seem a bit simplisitic: Here is a web page where one can calculate some cases and envision how it should go;
http://www.socscistatistics.com/tests/pearson/Default2.aspx
Active today
Sometimes there are scaling factors that need to be taken into account.
When you do a help on Covariance (x,y)) and (Variance(x) in your programming language, what precisely are the equations that these functions boil down to. I just went through an exercise at work where in one language, the scaling factor were different than in a library.
When you do a help on Covariance (x,y)) and (Variance(x) in your programming language, what precisely are the equations that these functions boil down to. I just went through an exercise at work where in one language, the scaling factor were different than in a library.
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