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.