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Explain the concepts of specific risk, systematic risk, variance, covariance, standard deviation, and beta as they relate to investment management.

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Posted on 
May 21st, 2023
Home Homework Help Explain the concepts of specific risk, systematic risk, variance, covariance, standard deviation, and beta as they relate to investment management.
The concepts of specific risk, systematic risk, variance, covariance, standard deviation & beta are all key elements that investors must take into account when managing their investments. Unsystematic or specific risk refers to uncertainty that is associated with a particular investment due to individual factors, such as events at a company. Systematic risk (or market) on the other hand is influenced by larger external forces beyond one’s control making it more difficult to predict.

Variance & covariance provide measures of how volatile an investment’s returns may be based on its relationship with other asset classes whilst standard deviation indicates how far these returns may deviate from the average over a given period of time. Beta is ultimately a measure used to judge an investment’s sensitivity in relation to overall market movements with values greater than 1 indicating greater volatility.

These concepts are essential to investors who want to be able to make an informed decision when it comes time to manage their portfolios. They offer valuable insights into the potential risks and rewards, as well as important clues on how various assets will perform against one another or in markets.

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