Morningstar calculates a statistical measure known as beta to evaluate the performance of investment funds. Beta compares the excess return of a fund over T-bills to the market’s excess return over T-bills. A beta of 1.10 indicates that the fund has a beta coefficient of 1.10, meaning it has performed about 10% better than its benchmark index in bull markets and 10% worse in bear markets, assuming all other factors remain constant. This metric helps investors gauge the volatility and risk associated with a particular fund in comparison to the broader market.
Understanding beta is crucial for investors in making informed decisions about their investment portfolio. A beta above 1.0 suggests that the fund is more volatile than the market, while a beta below 1.0 indicates less volatility compared to the market. For instance, a beta of 1.10 implies that for every 1% change in the market, the fund is expected to change by 1.10%, either positively or negatively. Investors seeking higher returns may opt for funds with higher betas, but they should be aware of the increased risk involved.
In summary, a beta of 1.10 means that the fund has outperformed its benchmark index by approximately 10% in positive market conditions and underperformed by the same margin in negative market conditions, while maintaining other factors constant. It provides investors with insight into how the fund’s returns correlate with market movements, aiding in risk assessment and portfolio allocation.
(Response: A beta of 1.10 indicates that the fund has performed approximately 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant.)