R²

R-Squared Explained

How much of your portfolio's movement is explained by the benchmark

Formula

Corr(Rp, Rm)²

the square of the Pearson correlation coefficient between portfolio returns and benchmark returns.

What is the R-Squared?

R-Squared measures the percentage of your portfolio's return variability that can be explained by movements in the benchmark. An R² of 0.85 means 85% of your portfolio's day-to-day movement is attributable to the market benchmark. The remaining 15% comes from stock-specific factors. R² ranges from 0 to 1 (or 0% to 100%) and is essential for interpreting Beta correctly.

How to interpret it

R² is a context metric — it validates whether other metrics like Beta are meaningful. A Beta of 1.2 with an R² of 0.9 is highly informative: 90% of your returns are benchmark-driven, so Beta is a reliable predictor. A Beta of 1.2 with an R² of 0.3 is nearly meaningless: only 30% of your returns track the benchmark, so Beta doesn't tell you much about your actual risk exposure.

What counts as a good R²?

0 – 0.3Low — portfolio is largely independent of the benchmark

0.3 – 0.7Moderate — partial benchmark tracking; significant idiosyncratic exposure

0.7 – 0.9High — portfolio closely mirrors the benchmark

> 0.9Very high — near-index tracking; limited active management value

What affects your R²?

Number of holdings — more holdings increases correlation to the broad market
Benchmark selection — R² changes dramatically with benchmark choice
Sector/geographic concentration — concentration reduces R²
Active vs passive strategy — index funds will approach R² = 1.0

How Portivex uses R²

Portivex shows R² alongside Beta so you can assess whether your Beta figure is statistically meaningful. It's also used to determine benchmark overlap days — a key input in the confidence tier calculation. When R² is below 0.5, Portivex surfaces a note that Beta should be interpreted with caution.

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Frequently asked questions

What does a low R-Squared mean for my portfolio?

A low R² means your portfolio returns are largely driven by factors other than the benchmark — specific stocks, sectors, or alternative assets. This can be intentional (active stock-picking) or unintentional (concentrated bet on one sector). It also means your Beta figure is less reliable as a measure of market risk.

Is a high R-Squared good or bad?

Neither inherently. A high R² means your portfolio closely tracks the benchmark. This is great for passive investors who want market exposure with low tracking error. For active managers, a high R² might suggest you're paying for active management while getting near-passive results — so-called 'closet indexing'.

How is R-Squared related to Alpha?

Alpha measures excess return above what Beta and R² would predict. For Alpha to be meaningful, R² must be high enough that the model (Beta × market return) is actually explaining most of your return variation. With a low R², the 'Alpha' figure absorbs too much unexplained variance to be trusted.

Related metrics

See your R-Squared in real time.

Add your holdings and Portivex calculates your R² — with confidence context and plain-English interpretation tailored to your investor profile.

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