Greetings I’m trying to understand the following relationship between a stocks Beta and its Standard deviation. The stocks Beta is a measure of a stocks variability in correlation with the market…right? and ultimately the risk the stock holds. (Systematic) So what would the stocks Standard deviation measure,? Its own variabilty to itself? Please advise,many thanks.
no worries, got it. The market portfolio’s risk is generally measured by standard deviation(CML). Systematic risk is used to calculate the SML hence the Beta is used.
To add a little more color . . . Standard deviation is used to measure the disparity between a portfolio’s returns and it’s mean (expected return) over a period of time. This is a measure of the portfolio’s volatility relative to itself. When we use Beta, we are examining the portfolio’s volatility compared to a benchmark. The SML compares the portfolio to the market; however, you can also compare a portfolio to any index (i.e. S&P 500, Lehman Agg, etc.) and apply the same logic: -Beta > 1 then your portfolio is more risky than the benchmark (higher risk; greater return) -Beta < 1 then your portfolio is less risky than the benchmark (lower risk; lower return) -Beta = 1 then your portfolio yields the same risk (equal risk; equal return) The same is true for a single security.
yeah, my explanation was alittle dull…Thanks : )