Risk Management 101 (Part 3)

Key Points

  • A histogram can be used to visually interrogate the distribution of a security’s returns.
  • These returns typically resemble a bell-shaped curve when viewed as a histogram.
  • A random variable that follows this type of bell-shaped distribution is said to follow a normal distribution.
  • There are certain characteristics of a normal distribution that can be helpful when investigating the returns of stocks, given an understanding of the assumptions involved in such analysis.
    Continue reading → Risk Management 101 (Part 3)

Risk Management 101 (Part 2)

Key Points

  • Volatility measures the dispersion of returns of a security, which can be estimated by calculating the standard deviation of historical returns.
  • Based upon this standard deviation measure, and an understanding of a stock’s average historical return we can estimate a stock’s range of expected returns.
  • This information can be useful in determining whether a particular stock lies within one’s risk tolerance when making investment decisions.
  • However, there are many assumptions associated with this analysis, which must be taken into consideration. Continue reading → Risk Management 101 (Part 2)

Risk Management 101 (Part 1)

Key Points

  • Sound investing comes down to focusing on what you can control, while still maintaining a solid understanding the risks associated with what you cannot.
  • Risk Management involves understanding and controlling for the uncertainties related to the financial markets (systematic risk) or a particular company (idiosyncratic risk).
  • Risk-adjusted return can be quantified by the ratio of expected return divided by risk.
  • Volatility is a common, although imperfect measure of risk.

Continue reading → Risk Management 101 (Part 1)