How can we Include Risk in Investment Evaluation?

Microeconomics
13th Edition
ISBN:9781337617406
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter16: Interest, Rent, And Profit
Section16.4: The Entrepreneur
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How can we Include Risk in Investment Evaluation?

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Risk is included in the investment evaluation  by using the following  methods like Beta, Standard Deviation , Value At Risk (VaR)etc. These measure the degree of risk present in any investment.

Beta:

Beta is the amount of Systematic risk that an individual stock has in relation to the entire stock market.Higher the beta, higher the risk.

 

 The Standard Deviation

It includes risk by measuring the historical volatility of any investment in relation to its annual rate of return. For Example: The stoch has higher volatility if the stock exhibits higher standard deviation.

 

VaR (Value At Risk):

It measures the risk that is associated with a portfolio. It measures the maximum loss for a specific period with a degree of confidence.

 

 

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