The beta is not a totally indicative depiction of a stock fund's situation. If a fund is "thinly traded," or in other words there are not too many shares outstanding, large price swings are possible whenever shares are sold. In general, however, beta values are a fairly reliable way of determining how a stock fund has done, and in a way, how well it may do in the future. Beta values for many mutual funds can be found in many financial magazines or special investing periodicals such as Investor's Business Daily.
Like the beta co-efficient, the standard deviation of a fund is important in determining volatility, and thus the risk involved in investing. The standard deviation takes into account both the upward and downward swing of a fund. In this way, the standard deviation of a fund measures its pure volatility, not in comparison to a standard. But, you may wonder, why should a fund be penalized for fluctuating upwards, or rewarded for fluctuating downwards? That is why neither standard deviation nor beta co-efficient values are totally accepted by all investors. They provide a rough guide, but are by no means flawless. Since the S&P is used to arrive at the beta co-efficient, it is obviously favoring blue-chip stocks (of which the S&P is largely composed).
The relationship between a fund's beta value and its actual performance is called alpha. The higher that this value is, the better. Anything over 0 is desirable. If a fund's alpha value equals 0, then the fund did precisely what was expected of it, giving its volatility. The following table will give you an idea of what different alphas have equaled in recent years for the top-performing funds:
The Value Line ranking of a stock safety is derived from a complex blend of the stock's standard deviation and other fundamental analyses. This rating is fairly accurate and good for the very serious investor. Value Line rankings are available at all libraries at the reference desk.
Risk vs. Reward and the Alpha
How much of a risk-taker you are is directly proportional to how much you stand to gain--and lose. Risk vs. Reward is a concept that nearly all investors struggle with and are constantly aware of. A good example of the relationship between risk and reward are high-yield (junk) bonds. They are amongst the most volatile investments that an investor can make, but on the upside, they also have tremendously high yields. Finding the "happy medium" often times is the difference between a good investor and a great one. Alpha Values for Various Mutual Funds
Turnover Rates
The rate at which a mutual fund buys and sells funds is called its turnover rate. A very high turnover rate is a red flag. If a fund has a turnover rate way over 100%, it will translate into increased expenses to the investors in terms of commissions, fees, etc.