• Investing Essentials

R Squared

Updated on March 6, 2023

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R-squared can be calculated as:

R2 =1− (Unexplained Variation/ Total Variation)

The above equation represents the effect of variation in the independent variables on the movement of the dependent variable. For investors, it is the degree or the percentage change in the stock or other securities in comparison to the change in their benchmark index.

A higher R2 value represents a higher correlation between the benchmark and the portfolio whereas a lower R2 value will indicate a lower correlation between the portfolio performance and the benchmark performance.