Question

Explain the differences in ranking stocks according to the standard deviation (SD) and beta. This should entail explaining the different aspects that SD and beta measure, and why a stock that has the highest standard deviation might not have the highest beta.

Answer 1

There is difference in ranking the stock according to standard deviation of the stock And The beta of the stock because both are representative of different elements of an investment.

beta is the measure of the volatility of the stock in relation to the overall market and beta will mean that how much the stock is sensitive in order to the market sensitivity and it is going to represent the movement of the stock by comparing it with the movement of the market.

The stocks which are having a higher beta than 1 will be relatively having higher volatility than the volatility of the market and stocks which are having beta less than one will be relatively lesser volatile than the overall market.

Standard deviation will be reflecting the deviation of Return of a stock from the the historical mean and it will reflect that how much the stock is deviating from the average return of that stock and it would also reflect the overall risk related to the portfolio.

Those stocks which are having higher beta will not be having higher standard deviation always because sometimes there are very stable stocks which are having low beta but their returns are highly fluctuating in nature and sometimes there are stocks which are having very high beta, but their standard deviations have been very low because their return have been consistent in nature.

So it can be said that the the stocks can be having different standard deviations and different beta and that could be probably contrasting each other because these movements are dependent upon various factors and performance of the stock and it is not interdependent upon each other .