Date: Mon, 19 Sep 2005 03:57:53 CST
From: "MichaelC" 
Newsgroups: misc.invest.financial-plan
Subject: Re: Relative risk of funds and indexes
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"anoop"  wrote in message
news:1127057912.149917.17060@g43g2000cwa.googlegroups.com...
> I am looking for some help, pointers to information, etc.
> that can help me understand the relative risk between
> various funds or indexes across different asset classes.
>
> As an example, here are the questions I'm trying to answer
> - Is the EAFE more or less risky than the S&P 500?
> - Is a certain European fund more or less risky than the EAFE?
> - Is a certain junk bond fund riskier than a certain value stock fund?
>
> I am aware of the "beta" that is cited with mutual funds that
> tells of the risk relative to the index that the fund is measured
> against.  I'm looking for relative risk of funds that track to
> different benchmarks.  I'm not sure if it's even possible to have
> something like this, but I thought I'd ask.

It's possible to find, but you also have to be prepared to do the math
yourself, oftentimes. Many answers can be found here:  www.ifa.com. I'm not
associated with them, but they put a LOT of financial planning/portfolio
management "secrets" out on their website, and every time I IM them, they're
more than happy to explain stuff to me, even though I always state upfront
that I'm not a prospect for their services.

(1) To address your specific questions, the EAFE has a standard deviation of
23.71 over 22 years. Over the same period, the SP500 has a SD of 16.39. So,
the SP is significantly less volatile (and therefore less risky). Over the
same period, the EAFE has returned 14.1% (not including this year, which
will up the average) while the SP has returned 14.5%. (Now, what gets pithy
is the fact that a portfolio containing equal investments of each does *not*
have a SD of 20.05 (the average between the two standard deviations) but a
standard deviation of 17.9%. This is due to correlation, which is a measure
of how the movements of each match one another, and is calcluated by taking
the .....well......never mind.  :-) )

(2) You have to calculate the standard deviations of both. You do this by
plugging their annual returns into an Excel spreadsheet, then use the STDEV
function over the range.

(3) Same as (2). The lower the standard deviation, the lower the risk. CD's
have a standard devation of almost zero, while most large-cap stocks, taken
individually, then to have standard deviations in the 30's or more.

Mike