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 (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.