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Determine the Measurement of Risk
There are three methods:
(1) Volatility: Volatility may be described as range of movement (or price fluctuation) from the expected level of return. For instance, the more a stock goes up and down in price, the more volatile that stock is.
(2) Standard Deviation: Investors and analysts must be at least somewhat familiar with the stud of probability distributions. As the return an investor would earn from investing is not known, it should be estimated. An investor may expect the total return on a particular security to be 10% for the coming year but in truth this is only a "point estimate". Formulas of measuring risk with the help of standard deviation are:
(3) Beta: Beta is a measure of systematic risk of a security which cannot be avoided through diversification. Beta is a relative measure of risk- risk of an individual stock relative to the market portfolio of all stocks. For instance, a security with a beta of 1.5 indicates that, on average, security returns are 1.5 times as volatile as market returns, both up and down.
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