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A Magical Metric That Isn’t

I was recently asked to comment on an article that appears in the April 2015 issue of the American Association of Individual Investors Journal. The article is based on the paper “Mutual Fund’s R2 as Predictor of Performance,” which was published in the March 2013 issue of The Review of Financial Studies.

As you may have already guessed, the study, which covered the period from 1988 through 2012 and included about 2,500 mutual funds, examines the role of R2 in mutual fund performance. R2 is a statistical measure representing the percentage of a fund or security’s returns that can be explained by movements in a benchmark index.

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