R squared - are we going to need to be able to calculate this?

Understand the returns based analysis formula and the meaning of R-squared but cannot remember how to calculate it (think we did this in level 2) anyone know whether the calculation of this might be required tomorrow?

Most likely not.

Thanks - I haven’t seen it anywhere in the material but just wanted to check… Don’t think I have the head space for any more formulas… Less calculations for level 3 they said

Just remember that it’s the square of r.

Don’t think we’ll have the SSR/SST.

BTW, when deciding whether the fund has been actively managed or not, we need to look at R2.

What’s the level of return unexplained by style that makes active management? I recall an exercise where a 90% R2 was considered active management (10% not explained by style), but… where is the limit?


Seems high for active management.

Question would most likley be along the lines of: Explain two reasons why the manager is a Value/Growth style.

Which you would use the R^2.

My point is that 1-r2 in a returns based analysis shows whether there was active management or passive management.

What’s the number to consider active management? It has nothing to do with either growth or value

A low R2 might also signal a lousy benchmark. A style drift isn’t always alpha.

Would be better to get a good fit with the benchmark, then calculate the active returns seperatley to determine active managment.

Security selection is only one factor that would explain a low(ish) R2. Which can be used in an active managment question to provide reasons if the number does not look high, I’d say <80.