Glossary term
R² (R-Squared)
The fraction of one variable's variance explained by another.
R² (pronounced 'R-squared') is a statistical measure that tells you how much of the variation in an outcome (e.g. individual stock returns) is explained by a factor (e.g. sector membership). An R² of 15% means that knowing which sector a stock belongs to accounts for 15% of the spread in stock returns; the remaining 85% is unexplained — and potentially exploitable by stock-picking.
Example: If a regression of stock returns on sector dummies gives R² = 20%, sectors explain one-fifth of the return variation that month.