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What is Beta?

Investing in securities such as mutual funds inevitably involves daily price movements. Understanding these up and down price movements—also known as volatility—can help when deciding among mutual funds as well as figuring out your level of comfort with a mutual fund’s potential future volatility.

There are various ways to calculate volatility, including metrics such as beta, standard deviation, alpha and Sharpe ratio. Beta measures the volatility of a security in comparison to the market as a whole. In other words, when looking at beta, an investor can determine whether a mutual fund experiences lower or higher price movements compared to the overall market.

Market beta is always set at 1, so a mutual fund with a beta of 1 has experienced the same price movement as the market. Further, a beta of less than 1 suggests the security is less volatile than the market. Therefore, if a mutual fund has a beta of 0.70, it was 30% less volatile than the market.

Vice versa, a beta of greater than 1 means that the security was more volatile than the market. As an example, if the beta of a mutual fund is 1.3, it has historically experienced 30% more up and down movements than the market.

Jemma Financial Wisdom: While some investors may prefer a mutual fund with a lower beta, remember that the market has two directions: A lower-beta mutual fund may not fall as much as the overall market when prices are falling, but it may not increase as much as the market when prices are rising.

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