What is R-squared? Definition and interpretation


## **Introduction**

When evaluating the performance of an investment fund, it is essential to assess its correlation with a benchmark index. R-squared, a statistical measure, quantifies the degree of correlation between an investment and its benchmark. In this blog, we will delve into R-squared and its significance for Hedonova in relation to the S&P 500. By understanding R-squared, investors can gain valuable insights into the fund's correlation with the benchmark index.

## **Understanding r-squared**

R-squared measures the proportion of an investment's movements that can be explained by the movements in its benchmark index. Ranging from 0 to 1, a value of 1 indicates a perfect correlation, while 0 indicates no correlation. R-squared helps investors evaluate how closely an investment's performance tracks that of the benchmark.

If a fund has a high R-squared value close to 1, it suggests that the fund's performance closely mirrors that of the benchmark. This indicates that the fund may be passively managed or designed to replicate the benchmark's performance.

Conversely, a low R-squared value closer to 0 implies that the fund's performance is less dependent on the S&P 500. This suggests the potential for active management or a strategy that deviates from the benchmark, providing investors with a unique investment proposition.

## **Interpreting Hedonova’s r-squared results**

![Graph showing Hedonova's R-squared results](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/What%20is%20R-squared%20Definition%20and%20interpretation/trend-line-for-series-min.webp)

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Hedonova’s average R-squared value is 0.123%, indicating a very close proximity to 0. This suggests that the fund's performance is independent of the broader market index, the S&P 500. Hedonova's R-squared value reflects its potential for active management and a strategy that deviates from the benchmark. Such characteristics make Hedonova an attractive option for investors seeking to diversify their portfolio and explore differentiated investment opportunities.

## **Conclusion**

R-squared is a valuable metric for assessing the correlation between an investment fund and its benchmark. By analysing Hedonova's R-squared value in relation to the S&P 500, investors can gain insights into the fund's reliance on the benchmark and its potential for distinctive performance.

Given Hedonova's close-to-zero R-squared value and an impressive alpha of 11.11% QOQ, it presents itself as an excellent choice for investors looking to diversify their portfolio and achieve favourable returns.

Remember, when making investment decisions, it is crucial to conduct thorough research, assess risk tolerance, and seek professional advice to align investment choices with individual financial goals.


R-squared is a statistical measure used to assess the correlation between an investment fund and its benchmark index. A high R-squared value near 1 indicates a close correlation, while a low value close to 0 suggests independence from the benchmark. Hedonova's R-squared value of 0.123% indicates its performance is independent of the S&P 500, making it an attractive option for investors seeking diversification and unique investment opportunities. With a close-to-zero R-squared value and an impressive alpha of 11.11% QOQ, Hedonova presents itself as an excellent choice for investors looking for favorable returns and portfolio diversification.



What is R-squared? Definition and interpretation

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