Significance of low value of r-square in regression

Reference no: EM1333255

Capital Asset Pricing Model (CAPM) is used to calculate the required return from a stock. To calculate the required return from ABC stock, a regression was run between the S&P Index daily retun over risk free rate and ABC daily returns over risk free rate on the historical data for 500 days. The R square value of the regression is 20%. What does this value represent. What does a low value of R square mean. Could you find some possible reasons for low R sqaure. Since the R square value is only 20%, can we conclude CAPM is not a good model to calculate the required rate of return.

Reference no: EM1333255

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