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Funds 203: Looking at Historical Risk: Standard Deviation and Beta

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1.
Beta is _______ risk measurement.
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A relative. Beta is a relative risk measurement, because it depicts a fund's volatility against a benchmark.
2.
A fund with a beta of 1.20 will do what if the market falls 10%?
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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%.
3.
What does standard deviation measure?
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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.
4.
You can draw the most accurate conclusions about the risks of which fund?
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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.
To make the most of a fund's standard deviation, compare it with _______.
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The standard deviations of other funds in its category. Standard deviation is not a relative measure. To determine whether a fund's standard deviation is high or low, compare it to the standard deviations of other funds or of an index.