Question

what is one way of measuring risk in the stock market?

Answer 1

Risk is an inherent concept to be considered in every investment. Two major components of risk are systematic risk and unsystematic risk. Systematic risk is a result of external and uncontrollable factors. These might not industry or sector or security specific and it can affect the entire market leading to the fluctuation in prices of all the assets / businesses / securities / investements.

On the other hand, Unsystematic risk refers to the risk which emerges out of controlled and known variables that are industry or sector or security specific.

Systematic risk cannot be eliminated by diversification of portfolio, multi businesses / sectors, whereas the diversification proves helpful in avoiding unsystematic risk.

Examples of risk that might be specific to individual companies or industries are business risk, financing risk, credit risk, product risk, legal risk, liquidity risk, political risk, operational risk, Global factors etc. Unsystematic risks are considered governable by the Company or industry.

Standard Deviation: Standard Deviation is the key unit for measuring the risk of a stock in a stock market. This factor explains and measures the Volatility. The more the stock's returns deviate from its average return, the more volatile the stock is.

Beta: Beta is another frequently used measure of Risk. It helps in measuring the amount of systematic risk being cosnidered in a security or a particular sector which is related to that stock or to the entire stock market. The Stock Market has a beta of 1 and it can be used to gauge the risk factor being carried by a security.