Measuring Stock Market Risk Essay

The stock has a low correlation coefficient to the benchmark rate of return this means that the stock rate is less correlated to the benchmark rate return. Hasbro has a high correlation coefficient in relation to the benchmark stock rate of return, On the beta value of the stock means that the Hasbro stock is highly responsive to the market conditions than the benchmark at the same time Reynolds stock rate of return responds with a lower degree than the benchmark stock rate of return. This shows that Hasbro stock is more volatile to market conditions than Reynolds stock has a lower rate return however the stock has lower variation than Reynolds stock and this means that the stock is less risky than Reynolds

Ameritrade went public only from March 1997, and this project investment decision is being presumed around August 1997. In the initial phase of a publicly-traded company, the stock return can be extremely volatile and difficult to estimate. This also presents a challenge that we cannot accurately calculate an equity beta (βE or βL) due to lack of sufficient historical data for variances and the expected return based on statistical tools. In such a scenario, we seek to use the data from similar companies within the same industry. It is prudent to use the data of companies that have similar capital structure, size, investments and business operations.

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Fama and French employ the one month NYSE stocks between 1926 and 1885 from the CRSP database. They rebalance ten decile portfolios based on the market value, price per share times share outstanding. One-month equal weighted portfolio returns are calculated and compounded continuously. The nominal returns ae adjusted by the CPI, and then summed on long rum returns. The estimation method for the regressions of r(t, t+T) on r(t-T, t) is the OLS.

The graph below shows how volatile the world’s stock market has been over the last year using the volatility index. Koesterich (2015) explains in the graph that higher index indicates that investors perceive the stock market to be riskier. The graph shows the volatility index between January 2014 and March 2015.

Here is the "intercept" and β1, β2, β3, and so on, are the "regression coefficients" of , , and so on

Divide the difference in the stock 's return rate minus the risk-free rate by the market (or index) rate of return minus the risk-free rate. This is the beta, which is typically expressed as a decimal value. In the example above, the beta would be 5 divided by 6, or 0.833.

This yields a daily return of 0.05% and an annualized return for the NASDAQ of 18.09%. After this has been carried out, the daily and annualized standard deviations are also found for both MSFT and NASDAQ. The daily standard deviation for the same period is considered which comes to around 2.74% and then this amount is annualized to yield an annualized standard deviation of 52.29%. The same process gives a daily standard deviation of NASDAQ as 1.43% and annualized standard deviation is 27.35% (Figure 1). In order to find the beta associated with the company, the same amounts are used and the covariance of MSFT and NASDAQ re divided by the variance of the market which is NASDAQ. This leads to a beta of

The financial market volatility will affect the capital and returns of an investment. Price volatility in the financial market can be caused by various factors and consequently the market risk is relatively large for investors. For instance, during the 2008 financial crisis, the majority of investment and capital market related are suffering from different levels of loss because of the sharply fell of the global capital markets. Hence, it is not predictable whether the final index level of this plan will be higher than the initial FTSE 100 Index level due to the market change.

For any corporate risk management program, there are a number of factors whose absence signals an increased likelihood of failure for the risk management program and whose presence greatly increases the chance for success of the program (Hillson and Simon, 2012). These factors, called Critical Success Factors (CSF), include the following:

    Today’s stock market offers as many opportunities for investors to raise money as jeopardies to lose it because market depends on different factors, such as overall observed country’s performance, foreign countries’ performance, and unexpected events. One of the most important stock market indexes is Standard & Poor's 500 (S&P 500) as it comprises the 500 largest American companies across various industries and sectors. Many people put their money into the market to get return on investment. Investors ask themselves questions like how to make money on the stock market and is there a way to predict in some degree how the stock market will behave? There are lots and lots of

These are the list volatile shares. This are shares of companies that sell goods that are consumed always. Selling of this goods and services doesn’t depend with the shape of the economy. Even when the economy is experiencing tough times, people still need to eat, drink, and turn the lights on.

The regression coefficient is called the beta of the security and it is a characteristic of its market risk. The index which adequately reflects the state of the economy in whole and includes share prices of large companies in various market sectors is taken as a market index. Typically, the basis for calculating the index capitalization is taken of its constituent securities.

There are two thought of Market Stock Volatility. One thought is that arbitrage or speculation, Stock Market improves the market efficiency and reduces volatility. Other thought Introduction of future Trading add both derivatives and stock market. There are proponents is “Market completion” or “Stabilizing Forces” hypothesis.

The three most commonly used techniques are the “market model” (This is the most common one. I will be using this for my testing), Scholes-Williams, and Dimson estimators. There are numerous advantages/benefits as well as some flaws in all the beta estimating techniques. Examining that fall outside the field of this paper but the limitation section looks at the problems of the different techniques very briefly. In order to compare the two models, staying consistent with the estimation techniques will be sufficient regardless of their flaws or biases.