Standard deviation and beta
Standard deviation and beta are the appropriate measures of risk of investment
The standard deviation is an evaluation of the dispersion of data from the mean. Where the dispersion is wide it implies that the deviation is higher. Standard deviation measures the volatility of the returns hence, low standard deviation would mean returns would be in a narrow range which is ideal to an investors. Standard deviation basically reports the volatility of the funds, which point out the likelihood of the return to grow or decline within the shortest period of time. The security that is deeming volatile is considered higher risk since the performance might change very fast. The standard deviation of a fund appraises the risk by ascertaining the extent to which the fund changes as compared to its mean return, the average returns of a fund over a certain time[ CITATION Mic101 l 1033 ].
A fund depicts a steady 4 years return of 2.9% for instance, may depict a mean or average mean of 2.9%. The standard deviation from the fund might afterward be zero due to return of the funds being different about the mean of 2.9%. On the contrary, a fund that in every last 4 years return -4.8%, 18%, 3% and 29% will depict a mean of 11.3%. The fund will depict high standard deviation since return in every year is dissimilar from mean return which is therefore risky due to the fact that changes between negative and positive return within the short period causes big fluctuations[ CITATION Che10 l 1033 ].
To establish how good the fund is c capitalizing the return realized for its volatility, we may make a comparison of the fund with another same venture plan with same returns. The fund with low standard deviation might be more optimal since it is capitalizing the return realized for the amount of risk incurred. Consider the following graph.
The above figure depict that an investor might be buying larger amount of volatility risk on fund B unlike the recommended amount that will attain similar return as fund A. this would lead optimal risk/ return association[ CITATION Roy04 l 1033 ].
Whilst standard deviation establishes the volatility of a fund as per the disparity if the return for a period of time, Beta is an important statistical appraisal that establishes the volatility in terms of risk of a fund in relation to that of the benchmark. A fund with Beta of less than one implies that the performance of the fund is close to the index or benchmark performance. Beta of more than one would imply that there is greater volatility unlike of the entire market. Beta of less than one would imply less volatility as compared to the index or benchmark[ CITATION Roy04 l 1033 ].
Beta is statistical appraisal of the volatility of a stock with the entire market. It measures both systematic risk and performance of returns. Beta for a stock explains the how much of the stock price varies as compared to the market trend. Where a beta is more than one, it means that the beta is volatile. Beta is important in evaluating the hedge funds; it might depict the relationship between the returns of hedge funds and the return on market. Beta depicts how much the fund risk is occurring in some class of assets and may be used to evaluate against the market index. The valuation may be considered important to investors in determining how much to fund to invest in hedge price if they may be relevant to upheld their exposure in the equity market.
It can therefore be concluded that Beta is an important appraisal tool since it evaluates the risk of a venture that cannot be minimized by portfolio diversification. It doesn’t appraise the risk of an investment held on a stand-alone basis, but amount of risk the venture brings to an existing diversified assert In capital asset pricing model (CAPM), beta risk is the risk in which an investor must realize an expected return that is higher as compared to the risk free rate of interest[ CITATION Har071 l 1033 ].
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