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| *Ostroff, Fair and Company>>>Investing |
What do I look at in a mutual fund to tell me how risky it is? |
Are these numbers related to the risk of a mutual fund? Standard Index Dow Jones Moderate Port Best Fit Index Credit Suisse High Yield R-Squared 32 44 Beta 0.31 0.59 Alpha 2.28 1.35 How about these? Standard Deviation 2.93 Sharpe Ratio 1.65 Mean 8.99 Bear Market Decile Rank* 1 Standard deviation is THE benchmark for risk. It is an absolute measure of how much the mutual fund price varies on a daily basis. The second best measure for risk is Sharpe Ratio. This will tell you how much returns the mutual fund has gotten for the amount of standard deviation (i.e. risk). It is a relative term. This is important because it is always a trade-off of risk versus reward. You want to have an "efficient portfolio" that gives you the best prospective returns for the amount of risk that you are taking. Beta is the third measure of risk. This tells you the amount of sensitivity the mutual fund has to the "market", which is usually a specific index benchmark. In this case, it looks like "they" are using the wrong benchmark as High Yield funds always have a higher beta compared to its correct benchmark. My guess is that they are comparing it against the S&P 500, when that is not the appropriate benchmark. That aside, you should look at the R-squared when looking at the Beta. R-squared tells you what percentage of the performance is based on the underlying benchmark. In this case, the beta is 0.31 and the R-square is 32.44%. So when the benchmark moves 1%, the mutual fund tends to move by 0.31%. However, this relationship really only happens about 32.44% of the time - so it's a loose relationship. I'm not a fan of the High Yield funds right now. They have increadibly low spreads over risk free rates (e.g. 7%) compared to money market of 5%. You are taking a fair amount of risk (volatility) for not a lot of excess return (2%). If I'm not getting paid for risk, I don't invest. Thus, this is why I just sold my High Yield bonds. Source(s): CFA charter holder More than a decade in stock analysis Great explanation csanda......first time I've had it explained to me. If you had a $9,000 IRA that you needed to re-invest right now (for the long term), where would you put it? Thanks By the "long term" I mean for at least 10+ years. Any financial advisor worth his salt would not recommend a mutual fund without first knowing your financial needs/goals. Send me an e-mail and I can perhaps answer your question better. |
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