Risk measurements

There are objective ways to measure the risk that individual stocks, mutual funds, and managed account portfolios pose to the stability of your portfolio. You can find these statistics in research reports from independent and industry analysts, in the financial press and investment newsletters, in mutual fund prospectuses, and from your financial adviser.

Rate of return

A stock or portfolio's beta measures its rate of return in relation to the return of the overall market, which has a beta of 1. A stock with a beta higher than 1 can typically be expected to rise or fall in value faster than the market, while a beta lower than 1 anticipates change at a slower pace. For example, a stock with a beta of 1.5 is expected to gain 50% more than its relative benchmark in an up market and fall 50% more in a down market. A less-volatile stock with a beta of 0.8 is expected to gain 20% less but also lose 20% less than its benchmark.

Volatility

In the same vein, a stock or portfolio's standard deviation is a statistical measure of volatility, or how far its return moves above or below its average return over a certain period of time. The wider the range, the higher the standard deviation and the greater the risk of loss the stock or portfolio poses. The reverse is also true: The smaller the standard deviation, the lower the risk of volatile swings in return.