Understanding Volatility

Most people judge the risk of an investment by its volatility—how sharply its value may rise or fall over time. The amount of volatility you may feel comfortable with depends on your investment goals, time horizon and tolerance for risk. For mutual fund investors, risk is often measured by two statistics that use volatility of returns in their determination: standard deviation and beta.

STANDARD DEVIATION
Standard deviation measures a fund's volatility relative to its own past performance. If a fund's annual returns vary widely from year to year, the fund will have a relatively high standard deviation of returns. If a fund's annual returns are fairly consistent from year to year, the fund will likely have a lower standard deviation of returns.

BETA
Beta compares a fund's volatility to an appropriate benchmark, often the S&P 500 Index for broad U.S. stock funds. A beta of 1.00 means that a fund's total returns have shown the same degree of volatility as the S&P 500 Index. A beta greater than 1.00 indicates more historical volatility than the index, while a beta less than 1.00 indicates less volatility.

HISTORY LESSON
Investors concerned about volatility may want to look for funds with a lower standard deviation or a beta that is equal to or less than the broader market. Looking at standard deviation and beta together is one way to get a good picture of a fund's historical volatility. .


-- Taken from SmartMoney THE WALL STREET JOURNAL MAGAZINE