Standard Deviation Measures _____ Risk While Beta Measures _____ Risk

Expected take a chance and expected return are the two key determinants of share/security prices. In full general, the riskier an investment, the greater the expected average render. Practically speaking, adventure is how probable you lot are to lose coin, and how much money you could lose. Statistically, the all-time way to measure this is the variability in the price of a fund over time. Variability in price can exist described equally either beta or standard divergence. Beta is a measure out of the fund’s volatility relative to other funds, while standard deviation is a measurement of the spread in the fund share price over fourth dimension. On the reverse, standard departure describes only the fund in question, not how to compares to the index or to other funds. Volatility, however, is only one type of risk. Other risks non measured past beta and standard deviation, include bankruptcy, illiquidity, and consequent poor performance. Unfortunately, there is no mode to quantitatively measure these risks. Permit’south take a detailed look at the two volatility measures used in run a risk analysis.

What is Beta?

Beta measures the adventure (volatility) of an individual asset relative to the market portfolio. Beta aims to approximate an investment’southward sensitivity to market place movements. It is a measure of the fund’south volatility relative to other funds. It is not an absolute measure of volatility; it measures a stock’s volatility relative to the market as a whole. Therefore, beta measures how movement in the stock price relates to the changes in the entire stock market. It is the average change in percentage in the value of the fund accompanying a ane% increase or decrease in the value of the S&P 500 index. For example, a stock with a beta of one.v goes up about l% more than the index when the market goes down. Similarly, a stock with a beta of two.00 experiences price swings double than those of the broader market. An South&P index fund, by definition, has a beta of 1.0.

What is Standard Deviation?

Standard deviation is the most widely used statistical measure of spread which substantially reports a fund’southward volatility. The volatility of a unmarried stock is commonly measured by its standard deviation of returns over a contempo catamenia. The standard deviation of a stock portfolio is adamant by the standard deviation of returns for each individual stock along with the correlations of returns between each pair of stock in the portfolio. It includes both the unique risk and systematic risk. College standard deviations are generally associated with more than run a risk. If you scale the standard deviation of one market against another, you obtain a measure out of relative chance. The funds with standard deviations of their annual returns greater than xvi.5 are more volatile than average.

Difference between Beta and Standard Departure

Definition of Beta vs. Standard Divergence

– Both Beta and Standard deviation are 2 of the most mutual measures of fund’s volatility. Yet, beta measures a stock’s volatility relative to the market equally a whole, while standard deviation measures the adventure of individual stocks. Standard deviation is a measure that indicates the degree of incertitude or dispersion of greenbacks menses and is one precise measure of risk. Higher standard deviations are mostly associated with more chance. Beta, on the other hand, measures the adventure (volatility) of an private nugget relative to the market portfolio.

Calculation

– Beta is the average modify in percentage in the value of the fund accompanying a one% increment or decrease in the value of the S&P 500 alphabetize. An South&P index fund, by definition, has a beta of 1.0. A beta greater than 1.0 means greater volatility than the overall market place, while a beta below 1.0 accounts for less volatility. Standard departure is divers every bit the foursquare root of the mean of the squared difference, where deviation is the difference between an outcome and the expected mean value of all outcomes.

Example

– A stock with a 1.50 beta is significantly more than volatile than its criterion. It is expected to go up about fifty% more than the index when the market goes downwards. Similarly, a stock with a beta of 2.00 experiences price swings double than those of the broader market. Standard departure can be used as a measure of the average daily deviation of share toll from the annual hateful, or the year-to-year variation in total return. College standard deviations are mostly associated with more risk and lower standard deviations mean more than return for the corporeality of risk caused.

Beta vs. Standard Departure: Comparison Chart

Summary of Beta vs. Standard Divergence

Both Beta and Standard deviation are two of the most mutual measures of fund’s volatility. All the same, beta is a measure of the fund’southward volatility relative to other funds, while standard deviation describes only the fund in question, but not how information technology compares to the index or to other funds. Therefore, investment with higher standard deviations is generally associated with more adventure, while investment with lower standard difference yields pocket-size returns. On the contrary, a beta greater than 1.0 ways greater volatility than the overall market, while a beta below i.0 accounts for less volatility.