Why Beta Is Bunk as a Fund Measurement

The mathematical underpinnings of beta coefficients are considered so elegant, they could be works of art. They were also considered groundbreaking enough to help a couple of economists win the Nobel Prize. But for investors, you can just consider them bunk.

Investment analysts rely on beta coefficients to help determine the risk of one stock against the risk of the broader market. Most fund companies list the betas with their funds to help you measure your risk. For example, a fund with a beta of 0.80 is expected to advance about 80% of whatever the market -- or S&P 500 -- has gained.

The complete mathematical basis is more complex, with a risk-free rate of return, such as that from short-term Treasury bills, factored in. But if the last three years are any indication, beta coefficients simply don't work. ...