Beta

Beta is a statistical estimate of a fund’s volatility in comparison to its benchmark. It depicts how sensitive the fund is to movements in the section of the market that comprises the benchmark. A fund with a beta close to 1 means that the fund will generally move in line with the benchmark. If it is higher than 1, the fund is more volatile than the benchmark. For example, a fund with a beta of 1.5 would be expected to rise or fall 1.5 points for every one point of the benchmark’s movement.

In a rising market, if the beta in this example is an advantage, the converse would be the case in a falling market. In these conditions, managers would look for betas below 1 so that in a down market the fund would not perform as badly as the benchmark would.

It should be stressed that beta is merely an estimate. However, the stronger the r-squared correlation between the fund and the benchmark, the more reliable this estimate becomes.