Beta and Standard Deviation
Today I am going to discuss Beta and Standard Deviation in terms of mutual funds and stocks. Both are statistical terms, but they take a whole new meaning when you put them into investment perspective. I am discussing these in bulleted lists to make it simple and easy to understand.
- Beta is a statistical term that shows volatility with respect to the market or index as a whole.
- Beta does not measure a product’s unique volatility.
- Beta measures volatility based on the whole market.
- Higher beta means greater volatility.
- A product with beta 1 means it moves with the market. A product with beta 0 means it does not move with the market, e.g., cash.
- A product with beta more than 1 moves ahead of the market, and thus translates into greater volatility than the whole market or index.
- A product with beta less than 1 moves less than the market, and thus translates into lesser volatility than the whole market or index.
- Standard Deviation is a statistical term that shows volatility.
- It measures the range of performance.
- It shows how widely performances (or returns or values) are dispersed from the average.
- The greater the standard deviation , the greater the volatility.
- A volatile product is considered a high risk product.
First Published: June 27, 2008 ADawnJournal.com