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# Stock Risk Definition, Types and Quiz

To gain a comfort level here requires an understanding of Statistics; including, single- and multi-variable linear regression.
1. Define - Learn different types of stock risk.
2. Context - Use stock risk in a sentence.
3. Quiz - Test yourself. by Paul Alan Davis, CFA
Updated: February 18, 2021
Here we start with a high level understanding of where each type of risk is applied.

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## Understanding Stock Risk Analysis

Intermediate

Stock Risk is a general term for the variability of returns associated with a common stock traded on exchanges.

The two most common absolute measures are variance and standard deviation. So each stock has its own variance and standard deviation. The units of variance are in returns-squared, so it isn't as interpretable as standard deviation.

On the other hand, stock risk can also be measured relative to other stocks with covariance and correlation. For risk forecasting and performance attribution applications stock risk is decomposed into specific risk and systematic risk.

Synonym: stock variability

For context, there are certainly more complex measures of stock risk when utilizing a single-factor or multi-factor regression, including beta, factor exposures, systematic risk and specific risk, but the four mentioned above get you most of the way there.

Remember variance and standard deviation are the same, except the latter is the square root of the former. Similarly, covariance and correlation are related, but the math for the latter here is a bit different. Correlation is covariance divided by the product of the standard deviations for the two stocks.

R-Squared is correlation squared, and is an easy way to interpret the relationship between two stocks, or any two investments for that matter. It's scale is from 0 to 1.

### In a Sentence

Bev:  I'm amazed that four stock risk measures all start with demeaned returns.
Ann:  Yes, it's a powerful concept hidden behind a bad name.

### Video

Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.

Videos can also be accessed from our YouTube Channel.

### Video Script

If this term had a video, the script would be here.

### Quiz

Each individual stock has a variance and standard deviation, while each pair has a covariance and correlation coefficient. | True or False?

True

If a stock has a standard deviation of 16% annually, what is the variance? | 0.1250 or 0.0256 or 0.4000?

0.256 in units of returns-squared.

Still unclear on Stock Risk measures? Check out the Quant 101 Series, specifically Four Essential Stock Risk Measures.

### Related Terms

Our trained humans found other terms in the category investing concepts you may find helpful.

## What's Next?

• For all Glossary terms, click Outline.
• To reveiw the calculation of Stock Return, hit Back.
• Please. Help fight a world without coffee, click Tip.
• For the corporate action topic called Stock Split, click Next.

/ factorpad.com / fin / glossary / stock-risk.html

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stock variability
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stock standard deviation
stock co-movement
stock covariance
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stock correlation
stock risk modeling
stock specific risk
systematic risk
stock volatility

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