Whatever approach you take, the results will be easier to interpret if you have a grasp of how professionals measure financial risk. When it comes to stocks, investors confront two types of risk. One is posed by market downdrafts, which can punish even the most worthy investments. The other consists of problems specific to companies, such as mismanagement or obsolete products. For mutual funds, there is a third variety of risk, which is posed by ''a bad manager who charges high fees and doesn't make enough to recoup that cost,'' says Martin Gruber, finance professor at New York University's Stern School of Business.
Beta compares the magnitude of an investment's price swings with the market's overall fluctuations.
To see how it works, look at the Internet Fund. With a beta of 2.24, it is deemed more than twice as risky or volatile as the market, which is always assigned a beta of 1.0. Appealing because of its simplicity, beta is sometimes too crude to be useful. To find out whether you can trust beta to give you an accurate picture of an investment's risk, look up another statistical measure, R-squared. This tells you the degree to which an investment's price rises and falls at the same time as the benchmark it is being compared to.