Beta is a measure of a fund’s sensitivity to market movements. The beta of the market is 1.00 by definition. Morningstar calculates beta by comparing a fund’s excess return over Treasury bills to the market's excess return over Treasury bills. The best fit beta represents the market index that shows the highest correlation between a fund and an index over the most-recent 36 months based on the best fit R-squared.
To find the best fit R-squared, Morningstar regresses a fund's monthly excess returns against the monthly excess returns of several well-known market indexes.
The following indexes are regressed against each equity fund:
CSFB High Yield
Dow Jones 60% Global Portfolio
Dow Jones Financial
Dow Jones Healthcare
Dow Jones Telecommunications
Dow Jones Utility
GOLDMAN SACHS NATURAL RESOURCES
JSE Gold (USD)
Barclays Long Term Treasury Bond
MSCI AC Far East ex Japan ID
MSCI AC World ID
MSCI EAFE NDTR_D
MSCI EASEA (EAFE ex JAPAN) NDTR_D
MSCI EM ID
MSCI EM Latin America ID
MSCI EUROPE NDTR_D
MSCI Japan NDTR_D
MSCI PACIFIC NDTR_D
MSCI PACIFIC ex JAPAN NDTR_D
MSCI WORLD ex US NDTR_D
MSCI World Metals & Mining ID
MSCI World NDTR_D
Merrill Lynch Conv Bonds, All Qualities
Pacific Stock Exchange Tech 100
Russell 1000
Russell 1000 Growth
Russell 1000 Value
Russell 2000
Russell 2000 Growth
Russell 2000 Value
Russell Midcap Growth
Russell Midcap Value
Standard & Poor's 500
Standard & Poor's Midcap 400
DJ Wilshire 4500
DJ Wilshire REIT
The following indexes are regressed against each bond fund:
6 Month CD
CSFB High Yield
Citigroup ESBI-Capped Brady
Citigroup Non-$ World Govt Bond
Dow Jones 60% Global Portfolio
Barclays 1-5 YR GOVT
Barclays 1-5 YR GOVT/CREDIT
Barclays 5-10 Yr Govt/Credit
Barclays Long Term Govt/Credit Bond
Barclays Municipal 10YR (8-12)
Barclays Municipal 20YR (17-22)
Barclays Municipal 3YR (2-4)
Barclays U.S. Universal Bond
Barclays Aggregate Bond
Barclays Credit Bond
Barclays Government Bond
Barclays Intermediate Treasury
Barclays Long Term Govt Bond
Barclays Long Term Treasury Bond
Barclays Mortgage-Backed Bond
Barclays Municipal Bond
Barclays Municipal California
Barclays Municipal New York
MSCI AC World ID
Merrill Lynch Conv Bonds, All Qualities
Russell 2000
Standard & Poor's 500
DJ Wilshire 4500
Benefits
Both the standard and best-fit results can be useful to investors. The standard index R-squared statistics can help investors plan the diversification of their portfolio of funds. For example, an investor who wishes to diversify and already owns a fund with a very high correlation (and thus high R-squared) with the S&P 500 might choose not to buy another fund that correlates closely to that index. In addition, the best-fit index can be used to compare the betas and alphas of similar funds that show the same best-fit index.
Origin
Morningstar recalculates the best-fit index in-house on a monthly basis.