Difference Between Beta and Standard Deviation

Beta vs Standard Deviation
 

Beta and standard deviation are measures of volatility used in the analysis of risk in investment portfolios. Beta shows the sensitivity of a fund’s, security’s, or portfolio’s performance in relation to the market as a whole. Standard deviation measures the volatility or risk inherent to stocks and financial instruments. While both beta and standard deviation show levels of risk and volatility there are a number of major differences between the two. The following article explains each concept in detail and highlights the differences between the two.

What is Beta Measure?

Beta measures a security’s or portfolio’s performance (asset’s risk and return) in relation to the movements in the market.  Beta is a relative measure used for comparison and does not show a security’s individual behavior. For example, in the case of stocks, beta can be measured by comparing the stock’s returns to the returns of a stock index such as S&P 500, FTSE 100. Such a comparison allows the investor to determine a stock’s performance in comparison to the entire market’s performance. A beta value of 1 show that the security is performing in line with the market’s performance and a beta of less than 1 show that security’s performance is less volatile than the market. A beta of more than 1 show that a security’s performance more volatile than the benchmark.

What is Standard Deviation?

Standard deviation as a statistical measure shows the distance from the mean of a sample of data, or the dispersion of returns from the sample’s mean. In terms of a portfolio of stock, standard deviation shows the volatility of stocks, bonds, and other financial instruments that are based on the returns spread over a period of time. As the standard deviation of an investment measures the volatility of returns, the higher the standard deviation, the higher volatility and risk involved in the investment. A volatile financial security or fund displays a higher standard deviation in comparison to stable financial securities or investment funds. A higher standard deviation is seen to be more risky as the investment’s performance may change drastically in any direction at any given moment.

Beta vs Standard Deviation

Unsystematic risk is the risk that comes with the type of industry or company in which funds are invested. Unsystematic risk can be eliminated by diversifying investments into a number of industries or companies. Systematic risk is the market risk or the uncertainty in the entire market that cannot be diversified away. Standard deviation measures the total risk, which is both systematic and unsystematic risk. Beta on the other hand measures only systematic risk (market risk). Standard deviation shows an asset’s individual risk or volatility. On the other hand, Beta is a relative measure used for comparison and does not show a security’s individual behavior. Beta measures an asset’s volatility in relation to the market’s performance.

What is the difference between Beta and Standard Deviation?

• Beta and standard deviation are measures of volatility used in the analysis of risk in investment portfolios.

• Beta measures a security’s or portfolio’s performance (asset’s risk and return) in relation to the movements in the market.

• A beta value of 1 show that the security is performing in line with the market’s performance; a beta of less than 1 show that security’s performance is less volatile than the market, and a beta of more than 1 show that a security’s performance is more volatile than the benchmark.

• The standard deviation of an investment measures the volatility of returns, and so the higher the standard deviation, the higher volatility and risk involved in the investment.