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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.
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.
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True
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.
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