# Dealing With Risk

Dealing with Risk

TABLE

Risk Terms

BETA

Beta relates the volatility of a security to that of the market as a whole. If an investment moved exactly as the market moved, it would have a beta of 1.0.ALPHA

Most commonly used with mutual funds, alpha describes the difference between a fund's actual return and its expected return, given the level of risk it takes, as measured by beta. A fund with a positive alpha has done better than expected, while a fund with a negative alpha has underperformed.STANDARD DEVIATION

A statistical measure of the range a fund's price fluctuates within over time compared with its average price. If two funds have the same average return, investors should prefer the one with the lower standard deviation. To calculate it, average your investment's monthly returns over the past 36 months or longer. Then, subtract this average from each of the individual monthly return figures. This tells you how the investment has deviated from its average return. Then, square each figure and sum the results. The square root of this final number is the standard deviation.*SHARPE RATIO

This provides you with a return-per-unit-of-risk measure. To calculate it, take an investment's return minus the "risk-free" rate, divided by the investment's standard deviation.R-SQUARED

Tells you the degree to which an investment's returns rise and fall at the same time as the benchmark it is being compared with. An R-squared of 0 means an investment's returns have no correlation with the benchmark's fluctuations. A 100 reading indicates that they are perfectly matched. Low R-squareds also indicate that the beta of the security is not reliable.MORNINGSTAR RISK

Measures a fund's downside volatility relative to that of the average U.S. equity fund. To calculate it, Morningstar adds up the amounts by which a fund fell short of the three-month Treasury bill's return and divides by the total number of months in the rating period.

DATA: S&P PERSONALWEALTH.COM, BUSINESS WEEK, MORNINGSTAR, VANGUARD GROUP,