Based on Batten’s regression model, the coefficient of determination indicates that:

A. Stellar’s returns explain 2.11 percent of the variability in CPIENG.

B. Stellar’s returns explain 14.52 percent of the variability in CPIENG.

C. changes in CPIENG explain 2.11 percent of the variability in Stellar’s returns.

Howard Golub, CFA, is preparing to write a research report on Stellar Energy Corp. common stock. One of the world’s largest companies, Stellar is in the business of refining and marketing oil. As part of his analysis, Golub wants to evaluate the sensitivity of the stock’s returns to various economic factors. For example, a client recently asked Golub whether the price of Stellar Energy Corp. stock has tended to rise following increases in retail energy prices. Golub believes the association between the two variables is negative, but he does not know the strength of the association. Golub directs his assistant, Jill Batten, to study the relationships between (1) Stellar monthly common stock returns and the previous month’s percentage change in the US Consumer Price Index for Energy (CPIENG) and (2) Stellar monthly common stock returns and the previous month’s percentage change in the US Producer Price Index for Crude Energy Materials (PPICEM). Golub wants Batten to run both a correlation and a linear regression analysis. In response, Batten compiles the summary statistics shown in Exhibit 1 for 248 months. All the data are in decimal form, where 0.01 indicates a 1 percent return. Batten also runs a regression analysis using Stellar monthly returns as the dependent variable and the monthly change in CPIENG as the independent variable. Exhibit 2 displays the results of this regression model.

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Exhibit 1: Descriptive Statistics Mean Standard deviation Covariance, Stellar vs. CPIENG Covariance, Stellar vs. PPICEM Covariance, CPIENG vs. PPICEM Correlation, Stellar vs. CPIENG R Standard error of the estimate Observations Intercept CPIENG (%) Stellar Common Stock Monthly Return Exhibit 2: Regression Analysis with CPIENG Critical t-values One-sided, left side: -1.651 One-sided, right side: +1.651 Two-sided: 1.967 0.0123 0.0717 -0.00017 -0.00048 0.00044 -0.1452 Regression Statistics 0.0211 0.0710 248 Coefficients 0.0138 -0.6486 Standard Error 0.0046 0.2818 Lagged Monthly Change CPIENG 0.0023 0.0160 PPICEM 0.0042 0.0534 t-Statistic 3.0275 -2.3014