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R-Squared

What is 'R-Squared'

R-squared is a statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For example, an R-squared for a fixed-income security versus the Barclays Aggregate Index identifies the security's proportion of variance that is predictable from the variance of the Barclays Aggregate Index. The same can be applied to an equity security versus the Standard and Poor's 500 or any other relevant index.

Explaining 'R-Squared'

R-squared values range from 0 to 1 and are commonly stated as percentages from 0 to 100%. An R-squared of 100% means all movements of a security are completely explained by movements in the index. A high R-squared, between 85% and 100%, indicates the fund's performance patterns have been in line with the index. A fund with a low R-squared, at 70% or less, indicates the security does not act much like the index. A higher R-squared value indicates a more useful beta figure. For example, if a fund has an R-squared value of close to 100% but has a beta below 1, it is most likely offering higher risk-adjusted returns.

R-Squared Calculation Example

The calculation of R-squared requires several steps. First, assume the following set of (x, y) data points: (3, 40), (10, 35), (11, 30), (15, 32), (22, 19), (22, 26), (23, 24), (28, 22), (28, 18) and (35, 6).


Further Reading


R-squared and the economy
www.nber.org [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …

Stock market interdependence between China and the world: A multi-factor R-squared approachStock market interdependence between China and the world: A multi-factor R-squared approach
www.sciencedirect.com [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …

R Squared Measure of Stock SynchronicityR Squared Measure of Stock Synchronicity
papers.ssrn.com [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …

R-squared around the world: new theory and new testsR-squared around the world: new theory and new tests
papers.ssrn.com [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …

Gravity in fx r-squared: Understanding the factor structure in exchange ratesGravity in fx r-squared: Understanding the factor structure in exchange rates
www.nber.org [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …

R-Squared around the world: new theory and new testsR-Squared around the world: new theory and new tests
www.nber.org [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …

Stock market liquidity and economic growth: A critical appraisal of the Levine/Zervos modelStock market liquidity and economic growth: A critical appraisal of the Levine/Zervos model
www.tandfonline.com [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …

The impact of the financial crisis on new firm registrationThe impact of the financial crisis on new firm registration
www.sciencedirect.com [PDF]
… economic dynamism … 6 Figure 1. US Stock Comovement, 1926 – 2010 Panel A. R-squared is the mean of the R2s of Market Model regressions of each US stock's weekly (Weds.-to-Weds.) total … The economics of the information production industry reconciles several seemingly …



Q&A About R-Squared


How do you calculate an R-Squared?

First, assume the following set of (x, y) data points

What is the R-squared?

The R-squared represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index.

What does an R-squared represent?

An R-squared represents the proportion of variance that is predictable from the variance of a benchmark index.

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