Company unique portfolio risk companyunique risk

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: more market risk than others? market Yes. For example: Interest rate changes affect all firms, Interest but which would be more affected: more a) b) Retail food chain Commercial bank Do some firms have more Do market risk than others? market Yes. For example: Yes Interest rate changes affect all firms, Interest but which would be more affected: more a) b) b) Retail food chain Commercial bank Commercial Note As we know, the market compensates As investors for accepting risk - but only for market risk. Companymarket unique risk can and should be unique diversified away. diversified So - we need to be able to measure So measure market risk. market This is why we have Beta. Beta. Beta: a measure of market risk. Specifically, beta is a measure of how Specifically, an individual stock’s returns vary with market returns. with It’s a measure of the “sensitivity” of It’s “sensitivity” an individual stock’s returns to changes in the market. changes The market’s beta is 1 A firm that has a beta = 1 has average firm beta market risk. The stock is no more or less market The volatile than the market. volatile A firm with a beta > 1 is more volatile than firm beta more the market. The market’s beta is 1 The A firm that has a beta = 1 has average firm beta mar...
View Full Document

Ask a homework question - tutors are online