Friday, December 24, 2010

R-Squared

The R-Squared (R²) of a fund measures a fund's movements against its benchmark on a scale between 1 and 100. R-Squared is a statistical term that is found in a regression output, in essence it indicates how well one variable explains another; in this case it simply tells you how much of the returns of the fund are explained by movements of the market. An R-Squared of 100% says that all of the returns are determined by the market, you would expect such a result from a passive, index tracking fund, however you would not want to see this from an active managed fund - because the fund manager's job is to add to returns above and beyond the market. R-Squared is yet another useful and interesting tool for analysing fund performance.
 
Synonyms: Regression, R²
 
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