medium · FRM Part 1 Quantitative Analysis
A financial analyst is using an F-test to compare the model fits of two nested regressions. Regression 1 (the restricted model) has R^2 = 0.45 and Regression 2 (the unrestricted model) has R^2 = 0.50.
What does the F-test fundamentally evaluate in this scenario?
- Whether the intercept term estimated in the restricted regression model is equal to zero.
- Whether the two nested models produce statistically equal residual variances across observations.
- Whether the correlation observed between the two models' error terms is jointly and statistically significant.
- Whether the additional variables in the unrestricted model jointly add significant explanatory power.
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