How do we identify the most effective multiple for a sector by analysing its R-squared value against fundamental variables?

Sure, here are the steps to identify the most effective multiple for a sector by analysing its R-squared value against fundamental variables:

1. Identify the Sector and Fundamental Variables: The first step is to identify the sector you are interested in and the fundamental variables that are relevant to that sector. Fundamental variables could include things like earnings, revenue, cash flow, etc.

2. Collect Data: Collect data on the sector and the fundamental variables. This could involve gathering financial statements, market data, and other relevant information.

3. Calculate the Multiple: The next step is to calculate the multiple for each company in the sector. This could be a price-to-earnings ratio, price-to-book ratio, or any other multiple that is relevant to the sector.

4. Run a Regression Analysis: Run a regression analysis with the multiple as the dependent variable and the fundamental variables as the independent variables. This will give you a model that describes the relationship between the multiple and the fundamental variables.

5. Analyse the R-Squared Value: The R-squared value from the regression analysis tells you how well the model fits the data. A higher R-squared value means that the model explains a larger proportion of the variance in the multiple.

6. Identify the Most Effective Multiple: The most effective multiple is the one that has the highest R-squared value. This means that it is the multiple that is most strongly associated with the fundamental variables.

Remember, while a higher R-squared value indicates a stronger relationship, it does not necessarily mean that the relationship is causal. Other factors could be influencing both the multiple and the fundamental variables.