About this chart

One of the main criteria for modern portfolio management is measuring risk versus return.

The measure we use for Risk is Volatility ie the variability of a price over a given time period. For example, if we say the 12 month volatility of BHP is 21% what we mean is that we are 68% confident (1 Standard deviation) expect the price of BHP to be plus/minus 21% over the period.

So, if the price of BHP is currently $36.00, we can reasonably expect the price to move +/- $7.56 over the year. The 12 month Volatility of XJO is about 12%, so we can expect (68% chance) XJO to be +/- 649 points over the year. Because XJO represents 200 stocks, by definition you would expect it to be less volatile.

Even though individual stocks can have low volatility and high returns compared to the index over one period, the trick is always trying to pick the best stock for the future. Picking the best stock is always easy in hindsight.

This is why Index funds are becoming more popular. The management fees are a lot lower, transactional fees are a lot less and active managers can find it hard to beat an index (see S&P SPIVA report).