Question

Show one example of a calculation of risk and discuss its significance.

Answer 1

There Are many measure to calculate risk like beta, Value at risk, standard deviation, etc.

We are discussing beta. Beta is common measure of risk. Beta measures the amount of systematic risk an individual security or an industry has relative to the whole stock market. The market has a beta of 1. If security's beta is equal to 1, the security's price moves in time step with the market. A security with a beta greater than 1 indicates that it is more volatile than the market.

Example of calculation of beta.

For for calculation of beta = Covariance with market / Variance of market

For example

Calculate the beta of XYZ in comparison to the Market. Based on data over the past five years, XYZ and Market have a covariance of 0.030, and the variance of Market is 0.015.

Beta of XYZ = 0.030 / 0.015 = 2.00

This means XYZ is 100% more volatile than market ( 2 - 1 = 1 or 100%)