Risk
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The possibility that an actual return will differ from projected return
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How to measure
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Variance, standard deviation, beta
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How to reduce
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Diversification
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How to price
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Security market line, CAPM
Since Treasuries are essentially free of default risk, the rate of return on a treasury security is
considered the "risk-free" rate of return
Portfolio
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Combining several securities in a portfolio can actually reduce overall risk
Diversifying
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Investing in more than one security to reduce risk
Market Risk (systematic) (OVERALL)
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Nondiversifiable
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This type of risk can not be diversified away
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Changes in Interest
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Changes in cash flow
Company-unique risk (unsystematic)
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Diversifiable
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This type of risk can be reduced through diversification
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Labor goes on strike
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Something happens to management etc.
BETA (MARKET)
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Measure of market risky, systematic risk, and etc.
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Basically a measure of how an individual stock returns vary with market returns
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Measure of sensitivity
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