R-squared in mutual funds

Tue, 12 May 2026 00:00:00 +0000

R-squared (\(R^2\)), or the coefficient of determination, measures the proportion of a mutual fund’s return variance that is explained by variance in its benchmark index. It ranges from 0 to 1 (or 0 to 100 per cent). An R-squared of 1.0 (100 per cent) means all return variation is explained by the benchmark; an R-squared of 0 means the fund’s returns have no statistical relationship with the benchmark.

R-squared is an essential companion to beta because beta is only a reliable predictor of fund behaviour when R-squared is high. A fund with a calculated beta of 1.20 but an R-squared of 0.40 cannot be relied upon to behave in line with that beta, much of its movement is independent of the benchmark.

Benchmark Correlation on WebNotes

R-squared in mutual funds