Investing and Money Glossary, terms and definitions.

R-Squared

R-Squared ranges from 0 to 100 and tells what percentage of a fund's movements are explained by movements in its benchmark index.

An R-Squared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, an index fund that invests only in S&P 500 stocks will have an R-Squared very close to 100. Conversely, a low R-Squared value indicates that very few of the fund's movements are explained by movements in its benchmark index. Therefore, R-Squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-Squared will indicate a more useful beta figure. If the R-Squared is lower, then the beta is less relevant to the fund's performance.