Here we explain how the mutual fund's modern portfolio theory statistics and volatility measures mean. They will be useful when selecting funds (of course, not guaranteed). I underline those special points (for those "fast readers").

Modern Portfolio Theory Statistics

r-squared

An indicator that ranges from 0 to 100 and tells what percentage of a fund's movements are explained by movements in its benchmark index.

An r-squared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, an index fund that invests only in S&P 500 stocks has an r-squared very close to 100. Conversely, a low r-squared value indicates that very few of the fund's movements are explained by movements in its benchmark index.

beta

A measure of the sensitivity of a stock, bond, or fund to swings of an index or the overall market. Usually, stocks and equity funds are compared with the S&P 500 index; bonds and bond funds are compared with the Lehman Brothers Aggregate Bond index. A beta of more than 1.0 indicates higher volatility than the overall market. A beta of less than 1.0 indicates lower volatility than the overall market. If the S&P 500 moves 10% higher, a stock with a beta of, say, 1.1 should move 11%.

alpha

Measures the difference between a fund's actual returns and its expected returns given its risk level as measured by its beta. A higher alpha is better, but a high alpha is only reliable in the presence of a high R-squared value. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager.

A positive alpha figure indicates the fund has performed better than its beta would predict. A negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta.

Volatility Measures

Standard Deviation

Standard deviation is a statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its history shows a wide range of performance, indicating a greater potential for volatility. The greater the standard deviation, the greater the fund's volatility.

Mean

The mean is one of the numbers used to calculate a fund's standard deviation. The mean is the average of a fund's monthly return over the last 12 months.

Sharpe Ratio

The Sharpe ratio measures risk-adjusted performance by comparing a fund's average monthly return to the average monthly return of a Treasury bill, which is a risk-free investment. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.

Treynor Ratio

A gauge of risk-adjusted performance calculated by comparing the return of a portfolio to its beta. Higher values are desirable and indicate greater return per unit of risk.

Bear Market Decile Rank

This number reflects a fund's performance during a bear market (A prolonged downward trend in stock prices). Data showing a fund's performance during each bear-market month over the past five years are added together. Funds receive a rating between 1 (the best-performing 10% of funds) and 10 (the worst-performing 10%). Smaller is better. Only funds with at least five years of history are given a bear-market decile ranking.