
Portfolio Risks and Returns  Stock Risks
Types of Risks
Here are some risks associated with investing in the stock markets:
 Systematic risk  also known as market risk, this is the potential for the entire market to decline. Systematic risk cannot be diversified away.
 Unsystematic risk  the risk that any one stock may go down in value, independent of the stock market as a whole. This risk may be minimized through diversification. This also incorporates business risk and event risk, as described in the "Bond Risks" section.
 Other risks  opportunity risk and liquidity risk (as described in the "Bond Risks" section) may also apply to stocks in a portfolio.
Quantitative Analysis
One of the concepts used in risk and return calculations is standard deviation, which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number).
The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk.
Standard deviation takes into account both systematic risk and unsystematic risk and is considered to be a measure of an investment's total risk.
Risk measures
There are three other risk measures used to predict volatility and return:
 Beta  measures stockprice volatility based solely on general market movements. Beta is a relative measure of systematic risk. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk, and potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of 0.85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.
 Alpha  measures stockprice volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk.
 Sharpe ratio  a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. It is a measure of riskadjusted return. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return. The formula is: Sharpe Ratio = (total return minus the riskfree rate of return) divided by the standard deviation of the portfolio.
Look Out! Of course, the reverse of "the larger the Sharpe ratio, the greater the return," is that the lower the ratio, the lower the potential return. If a security\'s Sharpe ratio were equal to "0", there would be no reward for taking on the higher risk, and the investor would be better off simply holding Treasuries (whose return is equal to the riskfree return component of the equation). 
RiskReduction Strategies for Stocks

Professionals
Measuring Portfolio Risks
FINRA/NASAA Series 66: Section 5 Measuring Portfolio Risks. This section discusses different risk measures: Beta, Alpha and the Sharpe Ratio. 
Professionals
Concept of Risk vs. Reward
FINRA Series 6: Section 9 Concept of Risk vs. Reward. In this section: Measuring Portfolio Risks, Risk Measures (Alpha, Beta, Sharpe Ratio), Asset Allocation, Risk Tolerance and Time Horizon. 
Professionals
Rates of Return  Internal Rate of Return
FINRA/NASAA Series 65  Rates of Return  Internal Rate of Return. In this section Internal rate of return, real return, riskadjusted return, beta and total return. 
Mutual Funds & ETFs
5 Ways To Measure Mutual Fund Risk
These statistical measurements highlight how to mitigate risk and increase rewards. 
Bonds & Fixed Income
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Professionals
Risk and Return Measures
Risk and Return Measures 
Fundamental Analysis
How Investment Risk Is Quantified
FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk. 
Fundamental Analysis
How To Manage Portfolio Risk
Follow these tips to successfully manage portfolio risk. 
Investing Basics
How to Use a Benchmark to Evaluate a Portfolio
What is an investment benchmark and how is it used to evaluate the risk and return in a portfolio. 
Bonds & Fixed Income
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth.

Sharpe Ratio
The Sharpe Ratio is a measure for calculating riskadjusted return, ... 
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. ... 
Risk
The chance that an investment's actual return will be different ... 
RiskAdjusted Return
A concept that refines an investment's return by measuring how ... 
Characteristic Line
A line formed using regression analysis that summarizes a particular ... 
Downside Deviation
A measure of downside risk that focuses on returns that fall ...

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