How do beta and standard deviation differ as risk measures?

The distinction between beta and standard deviation is a fundamental concept in finance related to understanding risk. Beta specifically measures systematic risk, which is the risk inherent to the entire market or market segment that cannot be mitigated through diversification. It reflects how much the price of an asset is expected to move in relation to market movements. For example, a beta greater than one indicates that the asset is more volatile than the market, suggesting that its returns will experience larger swings relative to market fluctuations.

On the other hand, standard deviation is used to measure total risk. It captures the overall volatility of an asset's returns, encompassing both systematic risk and unsystematic risk (the risk unique to an individual asset that can be minimized through diversification). A higher standard deviation indicates a greater degree of price variation, reflecting the level of uncertainty in the asset's return over a given period.

Understanding this distinction is crucial for investors as it enables them to assess how much risk they are taking on through a specific investment relative to the market and how diversification can help manage that risk.