Risk, Return, and Individual Stocks

W hen it comes to individual stocks, defining risk is tricky business . Investors can use return standard deviation for this purpose, but that definition is incomplete because it fails to take the benefits from diversification into account. They can use “beta” based on the capital asset-pricing model (CAPM), which does reflect a particular understanding about diversification, but many academic studies conclude that the CAPM does not work. They can use a multifactor model; however, there is no theory to identify exactly what the appropriate factors should be. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.