Friday, December 24, 2010

Beta

Beta is a measure of how a fund moves in relation to the index. A fund with a high Beta will move in a more exaggerated way versus the index, while a lower Beta will not move as much as the index. Specifically a fund with a Beta of 2 will return about 20% if the market moves up 10%, a fund with a Beta of 1 will move 10%, a fund with a Beta of 0 will move 0% with the market, and a fund with a Beta of -1 will move -10%. In terms of investor strategy, if you expect a bull market then use a high Beta fund (because the fund will capture more of the upside), but if you expect an uncertain market or a bear market than maybe use a low Beta fund (because the fund will not move as negatively if the market declines). Beta is an important metric to be aware of in terms of understanding your portfolio.
 
Synonyms: Market risk, Systematic risk
 
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