What is R-squared?
R-squared measures the relationship between a portfolio and its benchmark index, expressed as a percentage.
At a Glance
- R-squared is not a measure of the performance of a portfolio.
- A portfolio with a high R-squared performs in line with its benchmark.
- An investment with a low R-squared doesn’t move at all like the benchmark.
R-squared is not a measure of the performance of a portfolio. Rather, it measures the correlation of the portfolio's returns to the benchmark's returns.
A portfolio with a high R-squared performs in line with its benchmark. An R-squared of 100 indicates that all movements of a portfolio can be explained by movements in the benchmark. For example, an index fund that tracks the S&P 500 invests in the same stocks in the same proportions as the index; therefore, its R-squared is very close to 100.
An investment with a low R-squared doesn’t move at all like the benchmark. An R-squared of 35, for example, means that only 35% of the portfolio's movements can be explained by movements in the benchmark index.
