Page 89 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT
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Security Analysis and Portfolio Management




                    Notes              As a result, the judgment factor still dominates investment decisions.
                                       Risk can be defined as the probability that the expected return from the security will not
                                       materialize.

                                       Every investment involves uncertainties that make future investment returns risk-prone.
                                       Uncertainties could be due to the political, economic and industry factors.
                                       Risk could be systematic in future, depending upon its source.
                                       Systematic  risk is for the  market as a whole, while unsystematic risk is specific to an
                                       industry or the company individually.
                                       The first  three risk factors discussed  below are  systematic in nature and  the rest are
                                       unsystematic.
                                       Political risk could be categorised depending upon whether it affects the market as whole
                                       or just a particular industry.

                                       Beta is a  measure of  the systematic  risk of a security that cannot be avoided through
                                       diversification.
                                       Beta is a relative measure of risk - the risk of an individual stock relative to the market
                                       portfolio of all stocks.
                                       If the security's returns move more (less) than the market's returns as the latter changes,
                                       the security's returns have more (less) volatility (fluctuations in price) than those of the
                                       market.
                                       It is important to note that beta measures a security's volatility, or fluctuations in price,
                                       relative to a benchmark, the market portfolio of all stocks.
                                       The risk/return trade-off could easily be called the "ability-to-sleep-at-night test."
                                       While some people can handle the equivalent of financial skydiving without batting an
                                       eye, others are terrified to climb the financial ladder without a secure harness.
                                       Deciding what  amount of  risk you  can  take  while remaining comfortable with your
                                       investments is very important.
                                       The investor can minimise his risk on the portfolio. Risk avoidance and risk minimisation
                                       are the important objectives of portfolio management.

                                       A portfolio contains different securities;  by combining  their weighted returns we  can
                                       obtain the expected return of the portfolio.

                                   2.8 Keywords

                                   Beta: A coefficient, that describes how the expected return of a stock or portfolio is correlated to
                                   the return of the financial market as a whole
                                   Portfolio: A collection of investments held by an institution or a private individual
                                   Systematic Risks: A risk of security that cannot be reduced through diversification.

                                   Unsystematic Risks: Company or industry specific risk that is inherent in each investment. The
                                   amount of unsystematic risk can be reduced through appropriate diversification









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