FT4Web by Investors FastTrack 
Beta
Beta is a classical measurement of the volatility of a security with respect to the divendadjusted S&P 500 (SPDA). FastTrack adds a feature: Beta can be calculated with respect to any issue or index, not just the S&P500 Within FastTrack, Beta is used only within the spreadsheet. The calculation is a function of
Proper Use of BetaClassically, a broadmarket, US mutual fund with a Beta of 1.10 is expected to have price fluctuations that are 10% greater than the fluctuations of the S&P 500. Classical Beta is valid only when there is a reasonable correlation between the issue and the S&P 500. Issues that hold high proportions of gold stocks, international securities, or most sector investments are not be sufficiently well correlated to the S&P 500 to have a valid classical Beta. Generally, Cor= should be greater than 50% to have any validity, and a Cor=> 70% for common usage. 

Highly Correlated BetaThe charts shows a variety of lines that are highly correlated to the S&P500. Green Line: The S&P500 index as published in The Wall Street Journal each day (not dividendadjusted). By FastTrackdefinition the Beta of the green line is always=1.0. Red Line: The Vanguard S&P500 Fund dividendadjusted also has a Beta of 1.0, but note that the annualized return is a considerable 2% higher than S&CP, but this doesn't matter. Beta is NOT a function of return. Yellow Line: The Rydex Nova fund is an S&P500 fund augmented with futures to have a Beta of 1.5 (by design of the fund manager). Indeed FastTrack shows RYNVX's Beta = 1.51 . . . but Nova return falls far short of a Beta predicted 1.5 * the return of VFINX. Purple Line: The Rydex Ursa fund is an inverse S&P500 fund designed to have an inverse Beta of 1.0. Combining these VFINX and RYURX funds in the same portfolio would essentially produce a straight line with little or no return . . . However, this may be an important strategy for those seeking to hedge holdings (protecting against losses) until the prior gains become longterm. (for taxes or to satisfy a fund company holding period). Cyan Line: Fidelity Energy Services. The Beta is a low 1.11 . . . however, the SD= is a very high 11.89. This points out Beta's interpretation problems. For classic Beta, the target fund must have a high correlation with SPCP, or Beta becomes difficult to interpret. In this case, the low correlation(58.21), and high return of FSESX means that FSESX and VFINX could be held in the same portfolio for high return with moderate volatility. (i.e. diversification) 

FastTrack FTAlpha  Related to BetaThe chart above includes a column for FTAlpha. FTAlpha is a function of correlation, downside volatility, and return. FTAlpha is easier to interpret than Beta when looking for diversification. In this case the basis for FTAlpha is VFINX. Note the FTAlpha score of 0. This means that buying more VFINX will not change the risk or return of the current basis holdings of VFINX Note that FSESX has the highest FTAlpha value indicating that it is the best bet for diversification when combined with SPCP. The risk/reward ratio would improve both by increased return and reduced risk. The portfolio would have an SD= that is less than the average of the two issues' SD=, and a return that is greater than the average of the two returns. Also note, that FTAlpha's second choice is VFINX . . . while this paring would not affect risk, it would boost return. VFINX gains 2% more annually thus improving the risk/reward ratio. RYURX has a negative FTAlpha. Do pair VFINX and RYURX. While volatility would be greatly reduced, return would be very low. 

Using Flexible BetaFSESX is the most volatile of energy sector funds. By making FSESX the green line, Beta can rank all ENERGY family funds by Beta to produce meaningful results. Still Beta would be difficult to use in an exercise to pick the best Energy fund. 

Picking the Best Energy FundBy combining FSESX with the two highest ranked Energy funds (using FTAlpha) , it is possible to create a monthly equally rebalanced portfolio (yellow line). T Note the yellow average line follows the green FSESX line, but has all of the return of FSESX with about half the volatility. 

Click to see Morningstar's Principia Beta calculation in PDF form.There is a significant difference in the FT and MS calculation. They subtract a Treasury constant from each of their monthly returns before calculating. This is introduces a linear adjustment in the a calculation that produces a nonlinear result. Also, the concept of return without risk embodied in this calculation fell apart in the 2008 financial crisis making the MS beta values indeterminate based on estimated TBill returns. There are many different equations for computing Beta. here are some of the significant differences between MS and FT.
Finally, the correlation of these funds is pretty low to the S&P 500. As correlation drops 95%, Beta becomes a useless figure with low correlation offsetting volatility. The interpretation of a Beta of 1.5 (meaning 1.5 x performance of the S&P) is always suspicious. Compare the performance of VFINX (beta 1.0) to RYNVX o( 1.5) over any multiyear period. Consider using the Ulcer Performance Index for the fund relative risk/return instead of Beta. It has the distinct advantage of measuring only downside volatility. 
