How does a more granular set of indices lead to a higher R-squared?
Is anyone able to please explain the above?
More granular set of style indices has more parameters (growth,value and neutral vs just growth and value). More parameters usually produce a better fit and increase R-squared.
Not sure what you mean by “granular set if indices” but a high R-squared value would indicate that fund is highly correlated with benchmark.
if by granular you mean using a “Small cap Growth Index” as a benchmark rather than Broad market index then yes, it would result in higher R-squared. (Assuming growth style investing in small cap)