Building a handrail for your deck may seem like a simple task. In many cases it is -- until the time arrives to figure out how to get the balusters or spindles evenly spaced along the handrail. Evenly spaced spindles improve the symmetry of the rails and lend a professional look to the project. But finding the right measuring formula may give the average home handyman pause.
R-squared is a statistical measurement that determines the proportion of a security's return, or the return on a specific portfolio of securities, that can be explained by variations in the stock market, as measured by a benchmark index.
It turns out that in a simple regression model, the fraction of variance explained is precisely the square of the correlation coefficient--i.e., the square of r. Hence, the fraction-of-variance-explained has come to be known as R-squared. The interpretation and use of R-squared are discussed in more detail here.