{"id":24987,"date":"2022-06-01T06:55:03","date_gmt":"2022-06-01T06:55:03","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=24987"},"modified":"2024-08-02T16:28:30","modified_gmt":"2024-08-02T10:58:30","slug":"measurement-of-risk","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/measurement-of-risk\/","title":{"rendered":"Learn About Measurement Of Risk From Stock Market Course"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"24987\" class=\"elementor elementor-24987\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-685c5f6 elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"685c5f6\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div 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data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/stock-market-investments\/\">Stock Market & Investments<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-in-stock-market\/\">Risk In Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/measurement-of-risk\/\">Measurement of Risk<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-expected-return\/\">Risk & Expected Return<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-return-relationship\/\">Risk & Return Relationship<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/market-analysis-its-impact-on-prices\/\">Market Analysis & Its Impact On Prices<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/industry-analysis\/\">Industry Analysis<\/a><\/li><li><i class=\"fa 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      <i class=\"far fa-edit\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Study<\/span>                            \n                                                    <\/li>\n                                            <li id=\"slides\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"2\" role=\"tab\" tabindex=\"-1\" aria-controls=\"slides-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"fas fa-book-open\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Slides<\/span>                            \n                                                    <\/li>\n                                            <li id=\"videos\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"3\" role=\"tab\" tabindex=\"-1\" aria-controls=\"videos-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-eye\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                    \n                                  <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='Volatility' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>3.1 Volatility<\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-77224 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility.png\" alt=\"Volatility\" width=\"1928\" height=\"1495\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility.png 1928w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility-300x233.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility-1024x794.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility-768x596.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility-1536x1191.png 1536w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility-50x39.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility-100x78.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Volatility-150x116.png 150w\" sizes=\"(max-width: 1928px) 100vw, 1928px\" \/><\/p>\r\n<p>One of the clearest ways to understand risk in investments is through volatility, which represents the degree of uncertainty in future outcomes. Investors usually form an expectation about returns, but the actual results often differ. This gap between expected return and realized return is where volatility comes into play.<\/p>\r\n<p>Volatility essentially measures how much the price of a security fluctuates around its average or expected level. A stock that moves steadily within a narrow band is considered less volatile, while one that swings sharply up and down is highly volatile. Greater volatility means greater uncertainty, and therefore, higher risk.<\/p>\r\n<p><strong><b>Examples <\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Adani Group stocks (2023)<\/b><\/strong>: After the Hindenburg Research report alleged governance issues, Adani stocks saw extreme volatility. Prices crashed by over 50% in weeks, then partially recovered as investor confidence slowly returned.<\/li>\r\n<li><b><\/b><strong><b>Zomato IPO (2021)<\/b><\/strong>: The food delivery giant\u2019s shares surged initially but later experienced sharp swings as investors debated profitability in the tech-driven startup space.<\/li>\r\n<li><b><\/b><strong><b>Banking sector (2020 pandemic)<\/b><\/strong>: During COVID-19 lockdowns, bank stocks like SBI and ICICI Bank dropped steeply due to fears of rising NPAs, then rebounded strongly as the economy reopened.<\/li>\r\n<li><b><\/b><strong><b>Rupee vs Dollar (2022\u201323)<\/b><\/strong>: Currency volatility impacted IT exporters positively (Infosys, TCS gained from a weaker rupee) but hurt import-heavy industries like oil and aviation.<\/li>\r\n<\/ul>\r\n<p><strong><b>Investor Insight<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>High volatility<\/b><\/strong>= greater uncertainty, often linked to external shocks (policy changes, global crises, corporate scandals).<\/li>\r\n<li><b><\/b><strong><b>Low volatility<\/b><\/strong>= more predictable returns, often seen in stable sectors like FMCG or utilities.<\/li>\r\n<li>Measuring past volatility helps investors gauge the riskiness of a security, though it does not guarantee future stability.<\/li>\r\n<\/ul>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='Standard Deviation ' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>3.2 Standard Deviation<\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77225 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation.png\" alt=\"Standard Deviation\" width=\"1461\" height=\"1742\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation.png 1461w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation-252x300.png 252w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation-859x1024.png 859w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation-768x916.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation-1288x1536.png 1288w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation-42x50.png 42w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation-84x100.png 84w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Standard-Deviation-150x179.png 150w\" sizes=\"(max-width: 1461px) 100vw, 1461px\" \/><\/p>\r\n<p>Risk in finance is essentially the <strong><b>uncertainty of returns<\/b><\/strong>. Two investments may have the same average return, but if one fluctuates more than the other, it is considered riskier. Standard deviation captures this variability.<\/p>\r\n<p>Let\u2019s compare <strong><b>Company X<\/b><\/strong>\u00a0and <strong><b>Company Y<\/b><\/strong>. Both have similar expected returns, but their spreads differ.<\/p>\r\n<p><strong><b>Step 1: Returns Data<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Company X<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Company Y<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>15%<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>10%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>5%<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>12%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>20%<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>11%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>8%<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>9%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>14%<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>10%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Total = 62%<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Total = 52%<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p><strong><b>Arithmetic Mean:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Company X \u2192 62\/5 =12.4%<\/li>\r\n<li>Company Y \u2192 52\/5 =10.4%<\/li>\r\n<\/ul>\r\n<p>Both companies have comparable average returns, but the spread of Company X is wider.<\/p>\r\n<p><strong><b>Step 2: Probability Distribution &amp; Variance<\/b><\/strong><\/p>\r\n<p><strong><b>Company X<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Outcome<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Return (R)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Probability (K)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Weighted (R\u00d7K)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Deviation (R\u2013E)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Deviation\u00b2<\/b><\/strong><\/p>\r\n<\/td>\r\n<td width=\"228\">\r\n<p><strong><b>Weighted Deviation\u00b2<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>0.05<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>0.25<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.0125<\/p>\r\n<\/td>\r\n<td>\r\n<p>-0.074<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.005476<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.001369<\/p>\r\n<\/td>\r\n<td width=\"228\">\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>0.12<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>0.50<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.0600<\/p>\r\n<\/td>\r\n<td>\r\n<p>-0.004<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000016<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000008<\/p>\r\n<\/td>\r\n<td width=\"228\">\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>0.20<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>0.25<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.0500<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.076<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.005776<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.001444<\/p>\r\n<\/td>\r\n<td width=\"228\">\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Total<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>0.1225<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td width=\"228\">\r\n<p><strong><b>0.002821<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>&nbsp;<\/p>\r\n<p>Expected Return (E) = 12.25% Variance = 0.002821 Standard Deviation = \u221a0.0002821=5.3%<\/p>\r\n<p><strong><b>Company Y<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Outcome<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Return (R)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Probability (K)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Weighted (R\u00d7K)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Deviation (R\u2013E)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Deviation\u00b2<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Weighted Deviation\u00b2<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>0.09<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>0.25<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.0225<\/p>\r\n<\/td>\r\n<td>\r\n<p>-0.014<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000196<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000049<\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>0.11<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>0.50<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.0550<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.006<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000036<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000018<\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>0.13<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>0.25<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.0325<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.026<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000676<\/p>\r\n<\/td>\r\n<td>\r\n<p>0.000169<\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Total<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>0.1100<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td>\r\n<p>&nbsp;<\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>0.000236<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>Expected Return (E) = 11% Variance = 0.000236 Standard Deviation = \u221a0.000236 =1.5%<\/p>\r\n<p><strong><b>Step 3: Comparison<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td width=\"165\">\r\n<p><strong><b>Company<\/b><\/strong><\/p>\r\n<\/td>\r\n<td width=\"174\">\r\n<p><strong><b>Expected Return<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Standard Deviation<\/b><\/strong><\/p>\r\n<\/td>\r\n<td width=\"483\">\r\n<p><strong><b>Risk Level<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td width=\"165\">\r\n<p><strong><b>Company X<\/b><\/strong><\/p>\r\n<\/td>\r\n<td width=\"174\">\r\n<p>12.25%<\/p>\r\n<\/td>\r\n<td>\r\n<p>5.3%<\/p>\r\n<\/td>\r\n<td width=\"483\">\r\n<p>Higher risk<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td width=\"165\">\r\n<p><strong><b>Company Y<\/b><\/strong><\/p>\r\n<\/td>\r\n<td width=\"174\">\r\n<p>11%<\/p>\r\n<\/td>\r\n<td>\r\n<p>1.4%<\/p>\r\n<\/td>\r\n<td width=\"483\">\r\n<p>Lower risk<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Beta' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>3.3 Beta<\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77226 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta.png\" alt=\"Beta\" width=\"1824\" height=\"1548\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta.png 1824w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta-300x255.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta-1024x869.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta-768x652.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta-1536x1304.png 1536w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta-50x42.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta-100x85.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Beta-150x127.png 150w\" sizes=\"(max-width: 1824px) 100vw, 1824px\" \/><\/p>\r\n<p>Beta (\u03b2) is a measure of <strong><b>systematic risk<\/b><\/strong>\u00a0\u2014 the risk that arises from overall market movements and cannot be diversified away. It shows how sensitive a stock or portfolio is compared to the market index (such as Nifty 50 or S&amp;P 500). Investors use Beta to understand whether a stock will amplify market movements or dampen them.<\/p>\r\n<p><strong><b>Key Characteristics of Beta<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>\u03b2 = 1<\/b><\/strong>\u2192 The stock moves exactly in line with the market.<\/li>\r\n<li><b><\/b><strong><b>\u03b2 &lt; 1<\/b><\/strong>\u2192 The stock is less volatile than the market (defensive).<\/li>\r\n<li><b><\/b><strong><b>\u03b2 &gt; 1<\/b><\/strong>\u2192 The stock is more volatile than the market (aggressive).<\/li>\r\n<li><b><\/b><strong><b>\u03b2 &lt; 0<\/b><\/strong>\u2192 The stock moves in the opposite direction of the market (hedge asset).<\/li>\r\n<\/ul>\r\n<p><strong><b>Real-World Examples<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Company\/Asset<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Beta Value<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Interpretation<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Reliance Industries<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>1.1<\/p>\r\n<\/td>\r\n<td>\r\n<p>Slightly more volatile than Nifty 50; moderate risk.<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Infosys<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>1.3<\/p>\r\n<\/td>\r\n<td>\r\n<p>Tech stock, tends to swing more than the market.<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>NTPC<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>0.7<\/p>\r\n<\/td>\r\n<td>\r\n<p>Utility stock, defensive, less volatile.<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Gold ETF<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>-0.2<\/p>\r\n<\/td>\r\n<td>\r\n<p>Often moves opposite to equities; acts as a hedge.<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Nifty 50 Index<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>1.0<\/p>\r\n<\/td>\r\n<td>\r\n<p>Benchmark market index by definition.<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p><strong><b>Illustration in Practice<\/b><\/strong><\/p>\r\n<p>Suppose the Nifty 50 rises by <strong><b>10%<\/b><\/strong>:<\/p>\r\n<ul>\r\n<li>A stock with <strong><b>\u03b2 = 1.3 <\/b><\/strong>(Infosys) is expected to rise by <strong><b>13%<\/b><\/strong>.<\/li>\r\n<li>A stock with <strong><b>\u03b2 = 0.7 <\/b><\/strong>(NTPC) may rise only <strong><b>7%<\/b><\/strong>.<\/li>\r\n<li>A stock with <strong><b>\u03b2 = -0.2 <\/b><\/strong>(Gold ETF) might fall by <strong><b>2%<\/b><\/strong>, providing diversification.<\/li>\r\n<\/ul>\r\n<p>This demonstrates how Beta captures both the <strong><b>direction<\/b><\/strong>\u00a0and <strong><b>magnitude<\/b><\/strong>\u00a0of a stock\u2019s movement relative to the market.<\/p>\r\n<p><strong><b>Beta and CAPM (Capital Asset Pricing Model)<\/b><\/strong><\/p>\r\n<p>Beta is central to CAPM, which estimates the expected return on equity:<\/p>\r\n<p>Where:<\/p>\r\n<ul>\r\n<li><strong><b>K<\/b><\/strong><strong><sub><b>e<\/b><\/sub><\/strong>= Cost of equity (expected return)<\/li>\r\n<li>R<sub>f<\/sub>= Risk-free rate (e.g., government bonds)<\/li>\r\n<li>R<sub>m<\/sub>= Market return<\/li>\r\n<li>\u03b2= Stock\u2019s sensitivity to market<\/li>\r\n<\/ul>\r\n<p><strong><b>Example with Current Numbers<\/b><\/strong><\/p>\r\n<p>Suppose:<\/p>\r\n<ul>\r\n<li>Risk-free rate (R<sub>f<\/sub>) = 6%<\/li>\r\n<li>Market return (R<sub>m<\/sub>) = 12%<\/li>\r\n<li>Stock Beta (\u03b2) = 1.2<\/li>\r\n<\/ul>\r\n<p><strong><b>K<\/b><\/strong><strong><sub><b>e = 6% +1.2 * (12% -6%)=6%+7.2% =13.2%<\/b><\/sub><\/strong><\/p>\r\n<p>Thus, the investor should expect 13.2% return\u00a0for taking on the extra risk.<\/p>\r\n<p><strong><b>Expanded Insights<\/b><\/strong><\/p>\r\n<p><b><\/b><strong><b>Industry Differences<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Utility companies (like NTPC) usually have low betas because their revenues are stable and less dependent on economic cycles.<\/li>\r\n<li>Technology firms (like Infosys) often have high betas because their earnings are more sensitive to innovation cycles and market sentiment.<\/li>\r\n<\/ul>\r\n<p><b><\/b><strong><b>Portfolio Impact<\/b><\/strong><\/p>\r\n<ul>\r\n<li>A portfolio\u2019s overall Beta is the weighted averageof the Betas of its individual stocks.<\/li>\r\n<li>Adding a low-beta stock reduces portfolio risk, while adding a high-beta stock increases it.<\/li>\r\n<\/ul>\r\n<p><b><\/b><strong><b>Negative Beta Assets<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Assets like gold or insurance products sometimes show negative betas, meaning they move opposite to the market.<\/li>\r\n<li>These are valuable for diversification, especially during downturns.<\/li>\r\n<\/ul><\/div>\n<div id='text_slider_slide04' class='sa_hover_container' data-hash='Alpha' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>3.4 Alpha<\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77227 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha.png\" alt=\"Alpha\" width=\"1759\" height=\"1998\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha.png 1759w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha-264x300.png 264w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha-902x1024.png 902w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha-768x872.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha-1352x1536.png 1352w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha-44x50.png 44w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha-88x100.png 88w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Alpha-150x170.png 150w\" sizes=\"(max-width: 1759px) 100vw, 1759px\" \/><\/p>\r\n<p>Alpha (\u03b1) is a measure of how much an investment has outperformed or under-performed compared to what was expected, given its risk level. It is widely used to evaluate the skill of fund managers or the effectiveness of active investment strategies. While Beta explains how much a stock moves with the market, Alpha shows whether the investment has delivered returns beyond those justified by its risk exposure.<\/p>\r\n<p><strong><b>Key Points<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Alpha &gt; 0<\/b><\/strong>\u2192 The investment has outperformed expectations.<\/li>\r\n<li><b><\/b><strong><b>Alpha &lt; 0<\/b><\/strong>\u2192 The investment has under-performed relative to its benchmark.<\/li>\r\n<li><b><\/b><strong><b>Alpha = 0<\/b><\/strong>\u2192 The investment performed exactly as expected, given its risk.<\/li>\r\n<li><b><\/b><strong><b>Active Return vs Excess Return<\/b><\/strong>\u2192 Active return is measured against a benchmark index (e.g., Nifty 50), while excess return is measured against the risk-free rate.<\/li>\r\n<\/ul>\r\n<p><strong><b>Formula for Alpha<\/b><\/strong><\/p>\r\n<p><strong><b>\u03b1<\/b><\/strong>=R-R<sub>f &#8211; <\/sub>\u03b2 (R<sub>m <\/sub>-R<sub>f<\/sub>)<\/p>\r\n<p>Where:<\/p>\r\n<ul>\r\n<li>R= Portfolio return<\/li>\r\n<li>R<sub>f<\/sub>= Risk-free rate<\/li>\r\n<li>\u03b2= Systematic risk of the portfolio<\/li>\r\n<li>R<sub>m<\/sub>= Market return (benchmark index)<\/li>\r\n<\/ul>\r\n<p><strong><b>Example with Current Context<\/b><\/strong><\/p>\r\n<p>Suppose:<\/p>\r\n<ul>\r\n<li>Portfolio return (R) = 22%<\/li>\r\n<li>Risk-free rate (R<sub>f<\/sub>) = 6%<\/li>\r\n<li>Beta (\u03b2) = 1.1<\/li>\r\n<li>Market return (R<sub>m<\/sub>) = 14%<\/li>\r\n<\/ul>\r\n<p><strong><b>\u03b1 = (0.22-0.06)-1.1 (0.14-0.06)<\/b><\/strong><\/p>\r\n<p><strong><b>\u03b1 =0.16 -0.088=0.072 or 7.2%<\/b><\/strong><\/p>\r\n<p>This means the portfolio outperformed the benchmark by <strong><b>7.2%<\/b><\/strong>\u00a0after adjusting for risk.<\/p>\r\n<p>Formula: Alpha = R \u2212 [Rf + \u03b2\u00d7(Rm \u2212 Rf)]<\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Fund\/Stock<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Return (R)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Risk-Free (Rf)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Beta (\u03b2)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Market Return (Rm)<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>CAPM Expected Return<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Alpha<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p>HDFC Equity Fund<\/p>\r\n<\/td>\r\n<td>\r\n<p>20%<\/p>\r\n<\/td>\r\n<td>\r\n<p>6%<\/p>\r\n<\/td>\r\n<td>\r\n<p>1.0<\/p>\r\n<\/td>\r\n<td>\r\n<p>14%<\/p>\r\n<\/td>\r\n<td>\r\n<p>6+1.0\u00d7(14\u22126)=14.0%<\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>+6.0%<\/b><\/strong>\u00a0(outperformance)<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p>Infosys<\/p>\r\n<\/td>\r\n<td>\r\n<p>18%<\/p>\r\n<\/td>\r\n<td>\r\n<p>6%<\/p>\r\n<\/td>\r\n<td>\r\n<p>1.3<\/p>\r\n<\/td>\r\n<td>\r\n<p>14%<\/p>\r\n<\/td>\r\n<td>\r\n<p>6+1.3\u00d7(14\u22126)=16.4%<\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>+1.6%<\/b><\/strong>\u00a0(slight outperformance)<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p>Reliance Industries<\/p>\r\n<\/td>\r\n<td>\r\n<p>25%<\/p>\r\n<\/td>\r\n<td>\r\n<p>6%<\/p>\r\n<\/td>\r\n<td>\r\n<p>1.2<\/p>\r\n<\/td>\r\n<td>\r\n<p>15%<\/p>\r\n<\/td>\r\n<td>\r\n<p>6+1.2\u00d7(15\u22126)=16.8%<\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>+8.2%<\/b><\/strong>\u00a0(strong outperformance)<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p><strong><b>Alpha vs Beta \u2013 Comparison<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Measure<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Focus<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Meaning<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Example<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Alpha<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Performance<\/p>\r\n<\/td>\r\n<td>\r\n<p>Out-performance relative to benchmark<\/p>\r\n<\/td>\r\n<td>\r\n<p>Reliance delivering 6.8% above expected<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Beta<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Risk<\/p>\r\n<\/td>\r\n<td>\r\n<p>Sensitivity to market movements<\/p>\r\n<\/td>\r\n<td>\r\n<p>Infosys with \u03b2 = 1.3, more volatile<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 1,\n\t\t\tmergeFit : true,\n\t\t\tautoHeight : true,\n\t\t\tmouseDrag : false,\n\t\t\ttouchDrag : true\n\t\t});\n\t\tjQuery('#text_slider').css('visibility', 'visible');\n\t\tvar owl_goto = 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eael-tab-content-item \" data-title-link=\"slides-tab\">\n\t\t\t\t        <p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-11528 size-full\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t        \n                    <div id=\"videos-tab\" class=\"clearfix eael-tab-content-item \" data-title-link=\"videos-tab\">\n\t\t\t\t        <p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-11528 size-full\" src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t                    <\/div>\n        <\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Study Slides Videos 3.1 Volatility Of all the ways to describe risk, the simplest and possibly most accurate is \u00e2\u20ac\u0153the uncertainty of a future outcome.\u00e2\u20ac The anticipated return for some future period is known as the expected return. The actual return over some past period is known as the realized return. The simple fact that &#8230; <a title=\"Learn About Measurement Of Risk From Stock Market Course\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/measurement-of-risk\/\" aria-label=\"Read more about Learn About Measurement Of Risk From Stock Market Course\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":16695,"menu_order":3,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-24987","markets","type-markets","status-publish","format-standard","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/24987","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/markets"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=24987"}],"version-history":[{"count":9,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/24987\/revisions"}],"predecessor-version":[{"id":59593,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/24987\/revisions\/59593"}],"up":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/16695"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=24987"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=24987"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}