InvestorQ : What are types of risks that investors are exposed to when investing in the equity markets? What is meant by Beta?
manisha Kolvenkar made post

What are types of risks that investors are exposed to when investing in the equity markets? What is meant by Beta?

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Mahima Roy answered.
1 year ago
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Broadly, risks can be classified as Systematic risks and Unsystematic risks.

What exactly is unsystematic risk in this context? These are risks that are unique to a firm or industry. Factors such as management capability, consumer preferences, labour, etc. contribute to unsystematic risks. Unsystematic risks are controllable by nature and can be considerably reduced by sufficiently diversifying one's portfolio.

Then what are systematic risks in the investment context? These are risks associated with the economic, political, sociological and other macro-level changes. They affect the entire market as a whole and cannot be controlled or eliminated merely by diversifying one's portfolio.

Beta is an important measure of systematic risk and shows the extent to which the price of a stock moves with respect to the index movement. It is the extent to which different portfolios are affected by these systematic risks as compared to the effect on the market as a whole; which is measured by Beta. To put it differently, the systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio returns in relation to that of the market returns. For all practical purposes, the market returns are measured by the returns on the index (NIFTY, Mid-cap etc.), since the index is a good reflector of the market. Based on the Beta there are two types of stocks. There are aggressive stocks that have a beta of more than 1 and there are defensive stocks that have a Beta of less than one. The indices like the Nifty or the Sensex typically have a Beta of 1 or unity.
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