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Unformatted text preview: A mutual fund with a beta of 0.75 does not mean that its standard deviation of returns is lower than of the market returns as there are other factors that are involved in the volatility of a fund. Those are systematic and unsystematic risk. The beta of this mutual fund indicates that the mutual funds systematic risk is less than the markets systematic risk (that is, the beta is less than 1.0). However, this mutual fund may not be well diversified. For example, it may be a fund that holds only securities in a specific industry or sector. In that case, the mutual fund will have both systematic and unsystematic risk, while the market by definition has only systematic risk. The standard deviation of this fund will reflect the sum of both types of risk. If the level of unsystematic risk in the fund is high enough, then the funds total risk (standard deviation) may be higher than the markets total risk....
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This note was uploaded on 10/15/2011 for the course FIN 550 taught by Professor Smith during the Spring '11 term at Berklee.
- Spring '11