Question

Make distinctions between the standard deviation and beta in the measurement of risk in the capital market. Which one of these two metrics (standard deviation and beta) is relevant for measuring the risk of well-diversified portfolio? Explain why.

Answer 1

Standard deviation is the representation of the deviation of the returns from historical mean and it would be reflecting the higher amount of fluctuation and the lower amount of fluctuation of Return of a stock from the mean .

Standard deviation is also taken as a measure for overall portfolio risk associated with the portfolio and it is also used as a measure for unsystematic risks.

Beta is a representation of the volatility of the stock and it is a representation of the systematic risk associated with the stock and it would be representing the risk which cannot be managed.

I think standard deviation should be more relevant in measurement of risk of a diversified portfolio because standard deviation will be reflecting the overall portfolio risk associated with the portfolio whereas beta is just a representative of a single systematic risk and it is not a representative of multi factor systematic risk, so I will be using standard deviation as a measure for determination of the overall risk is associated with well diversified portfolio.