Risk There Are Many Sources Essay

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The major difference between standard deviation and the beta is that the former measures the volatility against the asset's own mean, whereas beta measures the asset's volatility against the market. Standard deviation, therefore, allows the user to understand the asset's specific risk on its own, and can use this information to compare returns against historical average returns. This is valuable because the risk profile of an investment can be significantly different than that of the market, so the returns will be expected to be significantly different as well. Standard deviation can also be used to measure against other means, for example against historic market returns. However, the beta coefficient is more effective as a measure against the market. Standard deviation and beta are both often used as measures on their own, without any model, because they communication the information clearly. In the capital asset pricing model, for example, the systematic factors are going to be equal among all stocks anyway, so differences in the expected returns of securities...

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The standard deviation, which is often used for mutual funds but can be used for any asset, is also used as a standalone risk measure. Many firms incorporate standard deviation into proprietary risk modeling software that evaluates portfolios.
The elements that contribute to price movements and returns -- and thus to beta and standard deviation -- are those that reflect firm-specific risk factors. Standard deviation will also include systematic risk, so all risk factors. Each unique individual factor can be analyzed independently, but often in financial management these aggregates are used to understand the firm's or portfolio's risk profile.

Works Cited:

Investopedia. (2013). Definition of beta. Investopedia Retrieved April 10, 2013 from http://www.investopedia.com/terms/b/beta.asp

Morningstar. (2010). Standard deviation. Morningstar Funds 200. Retrieved April 10, 2013 from http://news.morningstar.com/classroom2/course.asp?docid=2927&page=2

Sources Used in Documents:

Works Cited:

Investopedia. (2013). Definition of beta. Investopedia Retrieved April 10, 2013 from http://www.investopedia.com/terms/b/beta.asp

Morningstar. (2010). Standard deviation. Morningstar Funds 200. Retrieved April 10, 2013 from http://news.morningstar.com/classroom2/course.asp?docid=2927&page=2


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