What is R-squared (R²) in investing?

R-squared measures how much of an asset’s returns are explained by movements in a benchmark. Higher R² indicates the asset closely tracks the benchmark; lower values suggest idiosyncratic behaviour.

How is R-squared calculated?

R-squared is the coefficient of determination from a regression of asset returns on benchmark returns and equals the square of the correlation between those returns.

How should I interpret R-squared?

A high R² means returns are largely benchmark-driven; a low R² indicates more asset-specific drivers. Consider sample size, frequency, and stability over time when assessing fit.

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