What is systematic risk and how to measure it

Systematic risk is the risk that affects a security or portfolio due to its relationship with the market. Systematic risk is also called market risk, aggregate risk, or undiversifiable risk.

Systematic risk can’t be reduced through portfolio diversification. Since this risk is associated with overall market sentiment rather than performance of few stocks. Systematic risk results from forces which can’t be controlled by a firm. Read more

August 16, 2009 | Filed Under Stock market Terminology | Leave a Comment

What is investment risk?

An investment risk is a chance where actual return on the investment is lower than expected. This includes the possibility of losing some part of or all of the original investment

By looking at the definition, it is easily understandable that no one really wants any risk. But still people take risk. Why? The only reason is hope for higher returns.

People are Hoping higher returns and taking a chance!!

We will cover different ‘risk’ concepts and our understanding of that in the upcoming topics. Diversification is one of the strategy to reduce the risk. Read more

August 13, 2009 | Filed Under Fundamental Analysis | Leave a Comment

Disadvantages of over diversification

In the last post what is diversification, we gave a glimpse of diversification and a simple example to understand how it reduces the risk. In this topic we cover the disadvantages of over diversification mainly by considering the stocks. As of now I am not touching diversification across asset classes. To start with, when anybody thinks of diversification, probably the first question in his mind would be, how much I should diversify?. The best answer would be ‘not much’. Please look at below graph to understand further. Image courtesy : thismatter.com/money In the above figure, there are two risks explained. One is Systematic risk: this is also called as market risk. It implies, when the market sentiment is negative, your security prices may drop, however good your stock may be. In those scenarios, your diversification strategy doesn’t work. If you invested in 10 stocks, the chance is that all your 10 stock prices may come down along with the market.

August 13, 2009 | Filed Under You should know | Leave a Comment

What is diversification?

Diversification, is the term most sought after by investors, portfolio managers. Let’s understand what is meant by diversification, advantages and disadvantages of diversification & How to reduce the risk with diversification in present and upcoming articles

If you know meaning of famous phrase "Don’t put all of your eggs in one basket” probably you would have already knew the essence of diversification. In simple terms, diversification is to create a portfolio that includes multiple investments in order to reduce risk.

Let’s discuss the pros & cons of diversification with the examples. Assume you have 1,00,000 bucks to invest and you invested all the 1,00,000 bucks in only single company. If the company gives the good returns it’s fine, but what if the company is in deep crisis for some reason? Most probably you would lose major portion of your investment if not all. Read more