Beta risk measure is an important tool for evaluating mutual funds. It measures the volatility of a mutual fund’s returns relative to the overall market, indicating how much a mutual fund’s returns move in response to changes in the market. Beta is calculated by comparing the fund’s returns with the returns of a benchmark index such as the S&P 500.
A beta of 1 means that the mutual fund’s returns move in tandem with the overall market. This shows that the mutual fund is equally risky as the market. A beta of less than 1 indicates that the mutual fund is less volatile than the market. In other words, the mutual fund is taking less risk than the overall market. A beta greater than 1 indicates that the mutual fund is more volatile than the market, meaning it is taking more risk than the overall market.
For example, if a mutual fund has a beta of 1.2, it is expected to have returns that are 20% more volatile than the overall market. On the other hand, if a mutual fund has a beta of 0.8, it is expected to have returns that are 20% less volatile than the overall market.
Investors can use beta to evaluate a mutual fund’s risk level. A higher beta means that the mutual fund is more volatile than the market, which may not be suitable for investors looking for a low-risk investment. Conversely, a lower beta means that the mutual fund is less volatile than the market, which may be suitable for investors looking for a less risky investment. However, it is important to note that beta is not a perfect measure of risk, and other factors should be considered when evaluating mutual funds.
Beta is a widely used risk measure in the mutual fund industry that helps investors assess the level of risk associated with a particular fund. While it is a useful tool, it is not the only factor to consider when evaluating mutual funds, and investors should always perform thorough research and analysis before making any investment decisions.
