How to use beta and volatility of stock in the investment strategy?

how to use beta and volatility of stock in the investment strategy? these must be useful data, but rarely anyone use them or talk about them.

I use beta and volatility (standard deviation) all the time.

Under Modern Portfolio Theory (MPT), investments are a trade off between returns and risks. You'll want 5% for risk-free money market rate, but you should demand higher rates for something that is not as certain. For any given amount of risk (defined as their prospective volatility), investors would naturally want the highest return. Conversely, investors should pass on any investment with a lower return and an identical risk. A upward sloping line that connected all these "best" opportunities of investments creates the "Capital Efficiency Frontier"*.

When I invest, I am doing more than just simple ratios of returns. I am mentally doing the math of the "Sharpe Ratio" (i.e. returns per standard deviation). I want to make sure that for the amount of risk that I am taking in my portfolio, I am maximizing my returns. I also want to do mental math on what potential returns are. For example, if I am expecting the market to rise by 10% over the next 12 months and I have a 1.5 beta stock, I had better demand better than 15% returns as otherwise I am taking an extra half helping of market risk and not taking "alpha", which is returns above the Efficiency Frontier. Also, I want to pick low R-squared stocks and then minimize the cross-correlation of the stocks - this means I can have very low market risk, minimize my company risk through diversification and have very high returns.

As a result, I returned more than 80.0% on my 2006 returns with very low volatility. Beat that if you can.

* - okay, I simplified this, but hey, this is only Y!Answers. Take several years of this to get the full story by getting your CFA charter.