Beta measures the volatility of a security relative to

something, usually a benchmark index. A beta greater than one means the
fund or stock is more volatile than the benchmark index, while a beta of
less than one means the security is less volatile than the index.

If the market goes up by 10%, a fund with a beta of 1.0
should go up 10% and vice versa. While standard deviation determines the
volatility of a fund according to the disparity of its returns over a
period of time, beta, determines the volatility, or risk, of a fund in
comparison to that of its index or benchmark.

Beta is based on the capital assets pricing model which
states that there are two kinds of risk in investing in equities-
systematic risk and non-systematic risk. Systematic risk is integral to
investing in the market and cannot be avoided. Eg. risk arising out of
inflation and interest rates. Non-systematic risk is unique to a company
- can be mimimised by diversification across companies. Since
non-systematic risk can be diversified, investors need to be compensated
for systematic risk which is measured by Beta.

Mutual funds