2．Rebecca Anderson, CFA, has recently accepted a position as a financial analyst with Eagle Investments. She will be responsible for providing analytical data to Eagle’s portfolio manager for several industries. In addition, she will follow each of the major public corporations within each of those industries. As one of her first assignments, Anderson has been asked to provide a detailed report on one of Eagle’s current investments. She was given the following data on sales for Company XYZ, the maker of toilet tissue, as well as toilet tissue industry sales ($ millions). She has been asked to develop a model to aid in the prediction of future sales levels for Company XYZ. She proceeds by recalling some of the basic concepts of regression analysis she learned while she was preparing for the CFA exam.

Which of the following is the correct value of the correlation coefficient between industry sales and company sales?

A)   0.9757.

B)   0.2192.

C)   0.9062.

D)   0.0023.

The correct answer was A)

The R² = (SST - SSE)/SST = (12,500 - 600.50)/12,500 = 0.952

The correlation coefficient is the square root of the R² in a simple linear regression, which is the square root of 0.952 = 0.9757.