Page 69 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes

Notes Domestic political risk arises from changes in environmental regulations, zoning
requirements, fees, licenses, and most frequently, taxes. Taxes could be both direct and
indirect. Some types of securities and certain categories of investors enjoy a privileged tax
status.
International political risk takes the form of expropriation of non-residents' assets, foreign
exchange controls that won't let foreign investors withdraw their funds, disadvantageous
tax and tariff treatments, requirements that non-residents investors give partial ownership
to local residents, and un-reimbursed destruction of foreign-owned assets by hostile
residents of the foreign country.
Industry Risk: An industry may be viewed as group of companies that compete with each
other to market a homogeneous product. Industry risk is that portion of an investment's
total variability of return caused by events that affect the products and firms that make up
an industry.

Example: Commodity prices going up or down will affect all the commodity producers,
though not equally.
The stage of the industry's life cycle, international tariffs and/or quotas on the products produced
by an industry, product/industry related taxes (e.g. cigarettes), industry-wide labour union
problems, environmental restrictions, raw material availability, and similar factors interact
with and affect all the firms in an industry simultaneously. As a result of these common features,
the prices of the securities issued by the competing firms tend to rise and fall together.

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Caution These risk factors do not make up an exhaustive list, but are merely representative
of the major classifications involved. All the uncertainties taken together make up the
total risk, or the total variability of return.

2.1.2 Measurement of Risk

Volatility

Of all the ways to describe risk, the simplest and possibly most accurate is "the uncertainty of a
future outcome." The anticipated return for some future period is known as the expected return.
The actual return over some past period is known as the realized return. The simple fact that
dominates investing is that the realized return on an asset with any risk attached to it may be
different from what was expected. Volatility may be described as the range of movement (or
price fluctuation) from the expected level of return. For example, the more a stock goes up and
down in price, the more volatile that stock is. Because wide price swings create more uncertainty
of an eventual outcome, increased volatility can be equated with increased risk. Being able to
measure and determine the past volatility of a security is important in that it provides some
insight into the riskiness of that security as an investment.

Standard Deviation

Investors and analysts should be at least somewhat familiar with the study of probability
distributions. Since the return an investor will earn from investing is not known, it must be

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