Beta and Rsquared are two related, but different, measures. A mutual fund with a high Rsquared correlates highly with a benchmark. If the beta is also high, it may produce higher returns than the benchmark, particularly in bull markets. Rsquared measures how closely each change in the price of an asset is correlated to a benchmark. Beta measures how large those price changes are in relation to a benchmark. Used together, Rsquared and beta give investors a thorough picture of the performance of asset managers.
RSquared Measures How Performance Matches a Benchmark
Rsquared is a measure of the percentage of an asset or fund's performance as a result of a benchmark. It is reported as a number between 0 and 100. A hypothetical mutual fund with an Rsquared of 0 has no correlation to its benchmark at all. A mutual fund with an Rsquared of 100 matches the performance of its benchmark precisely.
Beta is a measure of a fund or asset's sensitivity to the correlated moves of a benchmark. A mutual fund with a beta of 1.0 is exactly as sensitive, or volatile, as its benchmark. A fund with a beta of 0.80 is 20% less sensitive or volatile, and a fund with a beta of 1.20 is 20% more sensitive or volatile.
Alpha is a third measure, which measures asset managers' ability to capture profit when a benchmark is also profiting. Alpha is reported as a number less than, equal to, or greater than 1.0. The higher a manager's alpha, the greater his or her ability to profit from moves in the underlying benchmark. Some topperforming hedge fund managers have achieved shortterm alphas as high as 5 or more using the Standard & Poor's 500 Index as a benchmark.
The alpha and beta of assets with Rsquared figures below 50 are thought to be unreliable because the assets are not correlated enough to make a worthwhile comparison. A low Rsquared or beta does not necessarily make an investment a poor choice, it merely means its performance is statistically unrelated to its benchmark. (For related reading, see: Understanding Volatility Measurements.)

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