Coefficient of Determination

The coefficient of determination is a financial figure or we can rightly say it is a statistic that is used to find out the percentage of change in the dependent variable that occurs due to the percentage change in the independent variable. The example of the coefficient of determination is the financial tool that is used by a number of businesses to find out the relationship between the dependent and independent variables of the business.

For example let’s say a manufacturer finds that the electricity bill of its manufacturing unit is increased unexpectedly from the last 6 months. The owner or the manufacturer will run a regression analysis of the last 6 months observations regarding the manufacturing units in question. The observations will lead to the result that 64 percent of the change in the cost of the electricity is due to increase in the working hours of the machines that are being used in the manufacturing unit. This example shows that the machines are the independent unit where as the electricity bill is the dependent variable that depends upon the total number of machine hours being consumed. In this example the coefficient of determination is 64 percent 0r 0.6.

The symbol of coefficient of determination is r-squared where r can be defined as the coefficient of correlation. The coefficient of determination of 64 percent means that the coefficient of correlation is 80 percent or 0.8. The range of coefficient of correlation is from -1 to +1 and the range of coefficient of determination is from 0 to 1.

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