R-squared.
In plain English
R-squared reports the share of a holding's price variation that lines up with the movement of a chosen index, with 100 meaning the two move in lockstep and 0 meaning no relationship at all. It is often shown as a decimal between 0 and 1 instead of a percentage. A broad index fund typically reports a figure very close to the top, while a specialty fund or a single stock reports much less. R-squared matters when reading other statistics, because beta and alpha measured against a benchmark that explains little of a holding's behavior are not meaningful numbers. Whatever the index does not explain is the idiosyncratic portion.
01Why it matters
A fund sold as a diversifier may show an R-squared close to the market's, which means it is delivering exposure already owned, under a different name and a higher fee.
02The math, step by step
A fund reports an R-squared of 0.95 against a broad market index and charges 0.60 percent more than an index fund. About 95 percent of its movement is the market. The remaining 5 percent is what the extra fee is buying, and on 100,000 that fee is 600 a year for that sliver.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
R-squared is not beta. Beta measures how large a holding's moves are compared with the index. R-squared measures how much of the movement the index explains at all. A stock can have a beta near 1 and an R-squared near 0.20, meaning the relationship is the right size but mostly noise.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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