I have two stocks and two different indexes that I was analyzing in Excel. I hav
ID: 2683511 • Letter: I
Question
I have two stocks and two different indexes that I was analyzing in Excel. I have the r^2 value of McDonalds with the SPX index (.25) Mcdonalds with the RMC index (.17). Tiffany with the SPX index (.6) and Tiffany with the RMC index (.66).What do these r^2 values mean and which index gives me a better r^2. I am just confused because i assumed that the lower r^2 is preferable and then the RMC gives mcdonalds the lower r^2 and the SPX gives tiffany the lower r^2 so i don't know how to answer the question.
Thanks in advance for the help!!
Explanation / Answer
A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For fixed-income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500. R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A high R-squared (between 85 and 100) indicates the fund's performance patterns have been in line with the index. A fund with a low R-squared (70 or less) doesn't act much like the index. A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100 but has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta. i hope this example will help in solving ur problem