Reflects the percentage of a fund’s movements that can be explained by movements in its benchmark index. An R-squared of 100 indicates that all movements of a fund can be explained by movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the fund’s movements can be explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund’s movements can be explained by movements in the benchmark index.
R-squared can be used to ascertain the significance of a particular beta. Generally, a higher R-squared will indicate a more reliable beta figure. If the R-squared is lower, then the beta is less relevant to the fund’s performance.
All MPT statistics (alpha, beta, and R-squared) are recalculated on a monthly basis based on a least-squares regression of the fund’s returns compared with the returns of the fund’s benchmark index. Morningstar deducts the current return of T-bills from the total return of both the fund and the benchmark index.