- Investment Organization
- Measuring Risk - Stock Investing
Measuring Risk - Stock Investing
- The Expected Value: The mean of a probability distribution of potential observations.
- Standard Deviation(SD): A common statistical measure of total risk that tells an investor how far from the mean (average) return a security's returns are likely to be. SD measures dispersion, which is the amount of deviation from the mean return. The wider the range of return, the higher the standard deviation. The lower the range of return, the lower the standard deviation. (1 SD =68%, 2 SD = 95%, 3 SD = 99%)
- Coefficient of Variation (CV): a relative measure of risk (risk per unit of return) and allows risk comparison among different investments. CV is the Standard Deviation divided by the mean return.
- Beta: A measure of a securities volatility relative to a benchmark, such as the market. It is most often applied to common stocks. A security with a beta of 1.0 matches the volatility of the market. A security with a beta greater than 1.0 exhibits greater volatility relative to the market. Beta is a measure of the systematic (non-diversifiable) risk. Betas for individual stocks change over time but betas for portfolios are fairly stable.
- Duration: measures the sensitivity of a bond's price to changes in interest rates (interest-rate risk). If a bond duration is 6, and interest rates rise by 1%, the bond's value could be expected to fall by 6%.