R-squared measures the relationship between a portfolio and its benchmark. It can be thought of as a percentage from 1 to 100. R-squared is not a measure of the performance of a portfolio. A great portfolio can have a very low R-squared. It is simply a measure of the correlation of the portfolio's returns to the benchmark's returns. If you want a portfolio that moves like the benchmark, you'd want a portfolio with a high R-squared. If you want a portfolio that doesn't move at all like the benchmark, you'd want a low R-squared. General Range for R-Squared: An R-squared of 100 indicates that all movements of a portfolio can be explained by movements in the benchmark. 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 portfolio'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 portfolio's movements can be explained by movements in the benchmark index. R-squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance.
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