How Much Should You Rely on Beta?
In Part 1 of a series on modern portfolio theory, we look at beta to determine the level of a fund's index-related risk.
Question: After the bear market, I've become a lot more attuned to how risky my investments are. Not being a finance person, I'm not sure how to use statistics like beta when selecting and monitoring my investments. Any pointers?
Answer: Individual mutual fund Analyst Reports on Morningstar.com feature a Ratings & Risk tab, which lists a number of quantitative risk/return measures. These measures include Morningstar's risk-adjusted ratings, several measures of volatility, such as standard deviation, and various modern portfolio theory statistics, such as beta, for the three-, five-, 10-, and 15-year periods. Each of these measures provides a different look at a fund's risk, volatility, return, or a combination of those factors.
MPT is rooted in the assertion that there's no free lunch--you'll only obtain higher returns if you're willing to take on more risk. At the same time, MPT holds that diversifying a portfolio across multiple assets can help decrease its risk level.
Esther Pak does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.