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1.
A fund with a beta of 1.20 will do what if the market falls 10%?
Fall 12%. A fund with a beta of 1.20 is 20% more volatile than the index. So if the index falls, the fund will fall 1.20 times as much--here, 12%.
2.
A fund has a standard deviation of 10 and an average return of 12% per year. What does that mean?
Ninety-five percent of the time, the fund's future returns will range between negative 8% and 32%. Future returns will fall within one standard deviation (returns between 2% and 22% in this case) of a fund's average return 68% of the time and within two standard deviations (returns between negative 8% and 32%) 95% of the time.
3.
Beta is _______ risk measurement.
A relative. Beta is a relative risk measurement, because it depicts a fund's volatility against a benchmark.
4.
You can draw the most accurate conclusions about the risks of which fund?
A fund with a beta of 1.10 and R-squared of 97. The lower the R-squared, the less reliable beta is as a measure of volatility; the closer to 100 the R-squared is, the more reliable the beta. Standard deviation and R-squared have nothing to do with each other.
5.
What does standard deviation measure?
How volatile a fund's returns have been versus a benchmark over a particular time period. Standard deviation is not a relative measure; beta is. Moreover, a fund can theoretically have a low standard deviation and still lose money while a fund with a high standard deviation can never lose a dime.
