R-Squared
The proportion of a portfolio's return variation that is explained by movements in its benchmark.
Formula
R-Squared = Square of the Correlation between Portfolio and Benchmark Returns, expressed as a percentage
Unit
%
In depth
R-squared tells you whether a beta or an alpha figure is meaningful at all: if only 40% of a fund's variation is explained by the benchmark, then its beta against that benchmark describes very little and its alpha is largely noise. A value above 85% means the benchmark is a reasonable reference; an index fund should show a figure close to 100%. A high R-squared paired with a high fee is the statistical signature of a closet index fund. It is a measure of fit, not of quality — a fund can track its benchmark closely and underperform it consistently.
Worked example
A fund with an R-squared of 96% and a beta of 1.05 is essentially the index with slight amplification. Its reported 0.4% alpha, charged for at 1.5%, is not compensation for anything the investor could not have bought cheaply.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “R-Squared” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.