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Best Fit Index

The market index that shows the highest correlation with a fund over the most-recent 36 months, as measured by the highest R-squared.

Both the standard and best-fit results can be useful to investors.

The standard index R-squared statistics can help investors plan the diversification of their portfolio of funds. For example, an investor who wishes to diversify and already owns a fund with a very high correlation (and thus high R-squared) with the S&P 500 might choose not to buy another fund that correlates closely to that index.

In addition, the best-fit index can be used to compare the betas and alphas of similar funds that show the same best-fit index. Morningstar recalculates the best-fit index in-house on a monthly basis.

Example: A fund shows the Russell 2000 as its best-fit index. The best-fit R-squared in this case is 92, which means that 92% of movements in the fund are comparable to movements in the Russell 2000.

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