What Is The Difference Between Beta And Volatility

Rob Isbitts Senior Contributor. Beta and standard deviation are measures of volatility used in the analysis of risk in investment portfolios.

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A stock with a high beta more volatile is considered riskier.

What is the difference between beta and volatility. Intuitively put you can say that volatility is the within variation and beta is the between variation. Alpha is a measure of the difference between a portfolios actual returns and its expected performance given its level of risk as measured by beta. On the contrary standard deviation describes only the fund in question not how to compares to the index or to other funds.

This confusion between risk and volatility can also easily lead to rash financial decisions. Beta primarily used in the capital asset pricing model CAPM is a measure of the volatilityor systematic riskof a security or portfolio compared to the market as a whole. Implied volatility measures investor sentiment about the future performance of a stock while beta compares a stock.

Beta measures systematic risk that cannot be diversified away. It may seem like splitting hairs to make the distinction between the two but believe me how well you understand the difference can make or break a sound financial plan. Within means the variation that A has within its own time-series whereas between means between A and the index.

The only difference between them is that beta deviation measures the volatility of a stock as a whole whereas a Standard deviation calculates the risks of a stock individually. Beta is a measure of the funds volatility relative to other funds while standard deviation is a measurement of the spread in the fund share price over time. This happens with companies like Groupon.

Enough of theory now lets get to an example to make things crystal clear. So I think when you think about the differences between a high-beta stock and a high-volatility stock or a low-beta stock and a low-volatility stock its going to be the measure in which you use. Low beta usually means that the equity just does not move with the SP 500.

Volatility however is only one type of risk. A beta greater than one indicates greater volatility than the overall market and a beta less than one indicates less volatility than the benchmark. Implied volatility and beta both describe aspects of a stocks volatility.

Volatility and momentum are two fundamentally different things and we will explore the differences between the two concepts how to measure. The misunderstandings and misconceptions between volatility and momentum can lead to expensive trading mistakes and can even result in totally flawed chart and market analysis and trading decisions. We explore these performance measures in another swatch.

Beta systematic risk and volatility total risk have a number of models and performance measures based on them. It could be more volatile or less volatile than the SP 500. A beta of 10 means an assets volatility is equal to the markets both are just as likely to rise or fall in value.

With low beta you cannot conclude anything about the volatility. This is a BETA experience. Beta Deviation measures the performance of a portfolio or security in relation to the movements in the market.

Since levered beta and unlevered beta are both measures of volatility used to analyze the risk in investment portfolios in financial analysis it is necessary to know the difference between levered and unlevered beta to decide which measure to use in your analysis. Low beta stocks can and often do have high volatility. Beta shows the sensitivity of a funds securitys or portfolios performance in relation to the market as a whole.

Standard deviation measures the volatility or risk inherent to stocks and financial instruments. In the total risk camp we have measures like Sharpe Ratio while in the beta camp we have Treynors measure and Jensens alpha. From a mathematical perspective the large discrepancies between beta and volatility come from stocks that have very little covariance with the market.

The risks of returns are calculated in standard deviation. Beta data about an. Beta vs Volatility Example.

Low-volatility stocks are usually less risky. A beta below 10 means an asset is less volatile than the market while and a beta above 10 means its more volatile than the market. The Difference Between Investment Risk And Volatility.

Beta is a measure of the systematic risk while Volatility is the measure of the total risk Systematic Unsystematic. Unlike beta which simply measures volatility alpha measures a portfolio managers ability to outperform a market index.

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