Question

• Discuss what is meant by “risk”.
• Discuss what factors would make a stock price change.
• Discuss the portfolio concept as it relates to risk.
• What is meant by ‘beta’? What type of risk is it measuring?

Answer 1

Answer(1): Risk- It is the uncertainty of occurring an event. It is the possibility of loss. Risk can be foreseen or unforeseen.

Types of risk- Are as following:

• Financial risk- It involves financial losses.
• Business risk- It is related to business.
• Non-business risk- It is related to economy and politics.

Answer(2): Factors that make a stock price change- Are as following:

• When company's revenue and profit are increasing, it will grow in the future then investors invest into the company and the share price goes up and vice versa.
• When company is announcing dividend then the stock price goes up but soon after paying the dividend, stock price comes down.
• When company has a good deal with any company or coming with a new product or service, its market share is increasing then its share price will also go up.
• When there is economic crunch in the country and overall stock market is in slowdown then company's share price comes down.
• Company's share price changes due to any fundamental, company specific news

Answer(3): Portfolio risk- Portfolio contains many stocks of different sectors and companies, each and every stock has its own risk and volatility. Portfolio risk can be minimized by adding few more stocks in the portfolio so that risk can be diversified. Some growth stocks and some income stocks should be there.

Answer(4): Beta- It is a measure of risk and volatility. It is a measure of systematic risk. Systematic risk is the overall market risk. Stock market has beta of 1. Beta tells the relationship of the security with respect to the stock market. If a security has higher beta, that stock will be more volatile.