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What does R2/R-Squared measure?

A measure of the percentage of a fund´s movements that can be accounted for by changes in its benchmark index. An R-squared of 100 indicates that a fund´s movements are perfectly correlated with its benchmark. Thus index funds that invest only in S&P 500 stocks typically could have an R-squared close to 100. Conversely, a low R-squared indicates that little of the fund´s movements can be explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund´s movements can be explained by movements in the benchmark index. R-squared can be used to ascertain the significance of a particular Beta. Generally, a higher R-squared will indicate a more reliable Beta. If the R-squared is lower, then the beta is less relevant to the fund´s performance.

Submitted on 12th Feb 2018

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