Statistics that measure mutual fund risk are crucial to the process of screening mutual funds. Investors need to know how risky individual assets are and what their contribution to the total risk of a portfolio would be.

I won't go into detail on the **standard deviation**
of returns, as it's covered thoroughly in Mean & Standard
Deviation, Investment
Risk and Risk
& Return. Suffice it to say that the standard
deviation is an important statistic that measures risk in terms of
variability, and in investing, variability is the standard measure of
investment risk. This applies not only to individual securities, but to
mutual fund risk as well.

The standard deviation of mutual fund returns is a measure of total risk, i.e., specific and systematic risk. However, the standard deviation of a well-diversified portfolio is both the total risk and residual risk, as 100% of the specific risk has presumably been diversified away.

**Beta**, a.k.a. market risk or systematic
risk, is another measure of risk that is covered in depth elsewhere on
this site. See Market Risk
and Risk & Return.

Beta measures mutual fund risk relative to a benchmark, usually the S&P 500, and is a measure of systematic risk rather than total risk. Like standard deviation, beta is a measure of variability but it's variability is relative to the benchmark rather than a fund's own mean. Beta will give you a good idea of how much a fund is likely to move with movements of the benchmark.

As beta is a measure of systematic risk, a portfolio's beta is simply the weighted average of the betas of the assets held in the portfolio, thus providing a measure of the systematic risk of the portfolio. As noted above, in a well-diversified portfolio, total risk is equal to systematic risk, as the specific risk has presumably been diversified away.

The **R-squared** statistic should be reported
along with beta. R-squared is one of the statistics generated by the regression analysis
used to derive a mutual fund's beta. It is the coefficient of
determination, which tells you what percent of the movement in the fund
is explained by movement in the benchmark used in the regression
analysis. The S&P 500 is the benchmark most commonly used for
this purpose. The higher the R-squared, the more reliable beta is as a
measure of probable variation.

R-squared is also the square of the correlation coefficient,
as such it will give you some idea of the degree of correlation between
a fund and the benchmark but, as the square root of a number is an
absolute value, you won't know whether R is positive or negative. It
also won't tell you how a fund behaves relative to other funds in your
portfolio. But R-squared is still useful for screening, as low values
indicate that a fund *may* have good diversification
potential and therefore warrants a closer look.

**Bond****
Duration** is the standard measure of a bond's sensitivity to
changes in interest rates. In general, the longer the duration, the
higher the sensitivity.

Interest rate sensitivity is the basis for a portion of the risk premium investors assign to bonds. The average duration of a bond mutual fund's holdings determines its overall sensitivity to fluctuations in interest rates and is the measure of the level of interest rate risk you are exposed to by holding the fund.

A bond's duration is the weighted average time to maturity based on the present value of the cash flow expected from the bond discounted at the bond's current yield to maturity. The average duration of a bond mutual fund is simply the weighted average of the durations of the bonds in the fund's portfolio.

The following is an
example of the computation of a bond's duration:

In this example, the bond's duration of 4.38 years would place it in the lower end of the Intermediate range of duration or interest rate sensitivity, depending of whose style box you are looking at.

That's mutual fund risk in a nutshell. As I noted above, all of these statistics are addressed in detail elsewhere on this site.