Variance Explained

The variance explained is also referred to as Standard R2 in StyleADVISOR. This is usually very close to the correlation squared. To understand what variance explained means, think of a manager and a Style Benchmark. Any variance in the difference between manager and Style Benchmark, i.e., any variance in the excess return of manager over benchmark, represents a failure of the Style Benchmark variance to explain the manager variance. Hence, the quotient of variance of excess return over variance of manager represents the unexplained variance. The variance explained is 1 minus the unexplained variance:

    Variance Explained = 1 - Var(e) / Var(M)


    var(M) = variance of manager returns
    var(e) = variance of excess return of manager over benchmark


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