How to Measure Volatility of Mutual Funds

A mutual fund’s net asset value, or price per share, is based on the prices of its underlying securities, such as stocks or bonds. Volatility is the extent to which a fund’s net asset value typically fluctuates. With all else being equal, a highly volatile fund has more risk than one with low volatility. A fund with high volatility can generate big returns, but it can also experience steep losses. You can measure a mutual fund’s volatility using its beta and standard deviation, which are two widely-available statistics.

Visit a financial website that provides mutual fund information. Type a mutual fund’s name or ticker symbol into the quote text box and click “Get Quote” to view its quote page.

Click “Risk” or a similar link to view the fund’s various statistics.

Identify the mutual fund’s beta. This measures how much its price moves compared with the overall market, which is typically represented by the S&P 500 or some other index.

Determine whether the fund’s beta is greater or less than 1, which represents the index’s beta. If beta is greater than 1, the fund is more volatile than the index. If beta is less than 1, it is less volatile. A fund moves, on average, in the same direction of the index by a multiple of its beta. For example, if a fund’s beta is 1.5, it is more volatile than the index. If the index rises by 10 percent, the fund increases 1.5 times that, or by 15 percent, on average.

Identify the fund’s standard deviation and its mean, or average, return. Returns might be monthly, annual or for some other interval. Standard deviation measures by how much a fund’s returns typically exceed or fall short of its average return. A higher standard deviation indicates more volatility. In this example, assume the standard deviation is 12 percent and the average annual return is 10 percent.

Subtract the standard deviation from the average return. In this example, subtract 12 percent from 10 percent to get -2 percent.

Add the standard deviation to the average return. Statistically, a mutual fund’s returns fall between your Step 6 result and this step’s result about 68 percent of the time. This 68 percent figure is inherent in all standard deviation measurements. In this example, add 12 percent and 10 percent to get 22 percent. This means there is a 68 percent chance the fund will return between -2 percent and 22 percent annually.

Multiply the standard deviation by 2. In this example, multiply 12 percent by 2 to get 24 percent.

Subtract your Step 8 result from the average return. Separately, add your Step 8 result to the average return. Statistically, a fund’s returns land between the two results in this step about 95 percent of the time. Concluding the example, subtract 24 percent from 10 percent to get -14 percent. Add 24 percent to 10 percent to get 34 percent. This means that the fund has a 95 percent chance of generating an annual return that is between -14 percent and 34 percent.