Chapter 11 of 12
Risk metrics: standard deviation, beta and the Sharpe ratio
7 min read
Return is half the story. The other half is how much the fund swung around on its way there. A few simple measures capture that.
Standard deviation
Standard deviation measures how far a fund's returns have varied around its average. A higher number means a bumpier ride. A fund with a standard deviation of 18% has been far more volatile than one with 9%.
Beta
Beta compares a fund's moves with its benchmark. A beta of 1 means it moved with the market, 1.2 means about 20% more than the market, and 0.8 about 20% less. A high-beta fund will usually rise more in good times and fall more in bad ones.
Sharpe ratio
The Sharpe ratio asks how much return a fund earned for each unit of risk it took, over what a risk-free investment would have paid.
Comparing two funds (illustrative)
- Fund A returned 14% with a standard deviation of 14%. Fund B returned 12% with 8%.
- With a risk-free rate of 7%: Fund A scores (14 − 7) ÷ 14 = 0.50.
- Fund B scores (12 − 7) ÷ 8 = 0.63.
- Fund B gave more return per unit of risk, even though its headline return was lower.
Key takeaways
- Standard deviation shows volatility; beta shows sensitivity to the market.
- Sharpe ratio measures return per unit of risk.
- Compare these only between similar funds.
This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.