Within the stock markets, risk and reward harmonise as an inseparable dynamic duo. They are always connected and work together, just like a lock and key. You need both for a complete picture. Risk is a vast concept and within it, we find two main categories: systematic risk and unsystematic risk. Systematic risk, also called market risk, is inherent to the overall market or a specific market segment. It cannot be diversified away and impacts all investments to some degree. Economic conditions, interest rates, and geopolitical events contribute to systematic risk.
In contrast, unsystematic risk is specific to a particular company or industry. Diversification or spreading investments across various assets can mitigate unsystematic risk. Examples include company-specific issues, management changes, or industry-specific challenges. By diversifying a portfolio, investors can reduce unsystematic risk, leaving mainly systematic risk, which is beyond their control.
What is Beta?
Beta is a key component of systematic risk, representing a stock’s sensitivity to overall market changes. Essentially, it gauges how a stock might respond to shifts in the broader market. A beta less than 1 implies lower volatility compared to the market, while a beta equal to 1 signifies the stock moves in tandem with the market. On the other hand, a beta exceeding 1 indicates higher volatility, suggesting the stock is more unpredictable.
BAB Strategy
This story is from the January 29, 2024 edition of Dalal Street Investment Journal.
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This story is from the January 29, 2024 edition of Dalal Street Investment Journal.
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