Equity Markets

In: Business and Management

Submitted By davegray5000
Words 870
Pages 4
A portfolios risk plays a huge role in an investors expected returns which is why it is so important to not only be able to measure this risk but also to have some sort of control over it. There are many different risk measures that are available which are becoming much easier to perform with the technology these days. Some of the most common include the standard deviation, Beta, Alpha and the sharp ratio. Using the correlation and covariance can also be useful when it come to diversifying a portfolio and reducing risk. Another thing that should be considered is the number of securities within the portfolio because this has a large impact on diversifiable risk.

1)Risk measures

-Why is it important to consider different risk measures?

Although standard deviation may be one of the most common and widely used tool to measure risk it is very important that one considers different risk measures as well as the standard deviation when constructing a portfolio. One reason for this is that the standard deviation does not take into account the securities volatility in relation to the market. Other measurements for example Beta can be a good measurement of this volatility. Two other measurements that are very important are correlation and covariance which tell you wether the securities are positively or negatively related, or maybe even not related at all. This can help investors further diversify their portfolio and reduce overall risk. The sharp ratio is also a very useful tool when it comes to measuring risk of a security and/or portfolio. "The idea of the ratio is to see how much additional return you are receiving for the additional volatility of holding the risky asset over a risk-free asset - the higher the better."
(understanding the sharpe ratio, 2010). The standard deviation which looks at how much variation there is from the mean can be very helpful,…...

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