Madanapalli institute of technology and science
DEPARTMENT OF MANAGEMENT STUDIES
ROLL NUMBER : 23691E00B5
NAME OF THE STUDENT : V.Narendra
YEAR & SEMESTER : 2ndYear & 3rd SEMESTER
NAME OF THE COURSE : MBA
ASSIGNMENT NO : 01
TITLE OF THE TOPIC : SAPM
ACADAMIC YEAR : 2024-2025
DATE OF SUBMISSION : 30-11-2024
NO.OF SHEETS/ PAGES : 04
NAME OF THE FACULTY : Dr.E.Gnana prasuna madam
Definition of Risk
Risk refers to the possibility of experiencing loss or deviation from an
expected outcome in any investment or business decision. It
measures the uncertainty and potential variation in returns from an
investment. In financial markets, risk is often quantified using
statistical measures like standard deviation, variance, beta, or value
at risk (VaR).
Types of Risks (with Examples)
1. Systematic Risk (Market Risk):
This is the risk inherent to the entire market or market segment. It is
non-diversifiable and caused by factors like economic recessions,
interest rate changes, geopolitical events, etc.
Example: If there is a global recession, the stock prices of most
companies will decline, and so will index prices.
2. Unsystematic Risk (Company-Specific Risk):
This is the risk specific to a particular company or industry and can be
reduced through diversification.
Example: A scandal in a company, such as fraud in accounting, may
lead to a sharp decline in its stock price while the overall index may
remain stable.
3. Credit Risk:
This is the risk that a company or individual may default on its
financial obligations.
Example: A company with declining stock prices might find it harder
to repay its loans.
4. Liquidity Risk:
This refers to the risk of not being able to quickly buy or sell an asset
without significantly affecting its price.
Example: A small-cap company's stock may have low trading
volumes, making it difficult to sell quickly.
5. Operational Risk:
This involves risks arising from internal systems, processes, or human
errors.
Example: If a company's supply chain collapses, it can affect its stock
performance.
6. Interest Rate Risk:
The risk of fluctuating interest rates affecting investments, especially
bonds, and stocks.
Example: Rising interest rates may reduce the attractiveness of equity
investments, causing a dip in stock prices.
7. Inflation Risk:
The risk that inflation erodes the purchasing power of returns from
investments.
Example: If inflation rises unexpectedly, it may negatively impact
consumer-oriented companies, reducing their stock prices.
Calculating Stock Alpha and Beta (Practical Example)
Alpha measures a stock's performance compared to a benchmark
index, while Beta measures the sensitivity of the stock's returns to
market returns.
Steps:
1. Obtain Data: Collect historical prices for a stock and a market index
(e.g., S&P 500) for the same period.
2. Calculate Returns:
Stock Return =
Market Return = where and are the current stock price and index
price.
3. Regression Analysis: Perform a regression of the stock's returns
against market returns to find:
Beta (β): Slope of the regression line.
Alpha (α): Intercept of the regression line.
4. Interpretation:
Beta > 1: Stock is more volatile than the market.
Beta < 1: Stock is less volatile than the market.
Alpha > 0: Stock outperforms the market.
Alpha < 0: Stock underperforms the market.
