Measures Of Investment Risk
Risks play an important role, in our daily lives as well as in our financial lives. It involves small things like crossing a street where there is risk of meeting with an accident, as well as something really large which can be life changing, such as making a wrong investment. The very first measurement of risks is called Beta. The Beta was actually instrumental in construction of CAPM (Capital Asset Pricing Model), which is the oldest and an extremely popular investment model. |
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The way in which Beta works is that it will measure security's relationship with underlying index, usually the S&P 500. A Beta of 1 tells an investor that on an average the security will move 100 percent of what the indices move. So, if S&P 500 is up 5 percent in a year, security also is expected to be up by 5% in the same year.
Standard Deviation tells the investors how much a particular security will fluctuate from their own returns. A security which has a higher standard deviation is more volatile compared to a security with a lower standard deviationy.
Volatility helps the investors to appreciate the level of the risk which, a person can expect from the portfolio. Many securities will surely fluctuate independently, of underlying index, at some point of time. It will perfectly synchronize with others.
Both the risk measurements are usually calculated using mostly historic information as well as their respective data. This makes them ineffective when it comes to forecasting losses or returns for the future.
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When it comes to managing investment, operation risk management is an integral part of any investment company. Based on how the operational risk is managed, the company is able to do away with inefficient practices and also risky procedures, so that the investor gains maximum benefits on his or her investment without facing any adverse consequences.