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Understanding Stock Market Risk
By Julia O’Neal; MA, CPA
Systematic risk, also known as market risk, is that part of a security’s risk that is common to all securities of the same general class (e.g., stock or bonds) and is caused by economic, sociological, and political factors.
Systematic risk cannot be eliminated by the physician-investor through diversification in an investment class.
Beta Co-efficient Measurement
The measure of systematic risk in stocks is the beta coefficient. The beta coefficient is the covariance of a stock in relation to the rest of the stock market. It reflects the magnitude of the co-movement of the stock’s returns with those of the market.
Stock Market Proxy
The Standard & Poor’s 500 Stock Index is generally used as a proxy for the market and has a beta coefficient of 1. Any stock with a higher beta is more volatile than the market.
For example, a stock with a beta of 1.3 is 30% more volatile than the market (up and down), and any stock with a lower beta can be expected to rise and fall more slowly than the market.
Investing Strategies
Conservative physician-investors whose main concern is the preservation of capital should focus on low-beta stock. Other doctors, more willing to take greater risks in an attempt to earn higher potential rewards, should include high-beta stock in their portfolios.
Three Types of Systematic Risk
Common to all assets are the following three systematic risk factors:
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Inflation or purchasing power risk,
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Interest rate risk, and
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Movements in the market in which a security is traded.
Conclusion
Are you willing to accept systematic, or stock market risk, in your investment portfolio; why or why not?
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Institutional: www.HealthcareFinancials.com
Terms: www.HealthDictionarySeries.com
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Filed under: Portfolio Management | Tagged: Investing Basics |
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