R-Squared.
A definition, in plain English — with the books that teach it.
What it means
R-Squared (R²) measures the percentage of a fund's or portfolio's price movements that can be explained by movements in its benchmark index. It ranges from 0 to 100. An R² of 95 means 95% of the portfolio's variance tracks the benchmark; an R² of 30 means most movements come from other factors. R² is used alongside alpha and beta — a high beta with low R² is less meaningful because the benchmark barely explains the portfolio's behavior.
Example
An actively managed large-cap fund has an R² of 92 relative to the S&P 500. That means 92% of its return fluctuations are explained by the index. Investors might ask whether paying active management fees is justified when the fund so closely mirrors a passive ETF.
