Determine Low, Medium and High Risk Group
In order to select companies’ shares with low, medium and high risk in London Stock Exchange, the definition of “low, medium and high” risk should be first determined. There are many methods to measure risk of assets. For instance, dispersion around the average (standard deviation) provides a measure of risk of assets. In this report, risk of a share is evaluated by reference to the company’s beta.
Beta is a risk measure that arises from the relationship between the return on a stock and the return on the market (Eltone, et al., 2013). If beta is equal to one, it means the return on the security is to increase (decrease) by the same amount that the market does. If Beta is greater than one such as 1.5, it indicates the return on the security is to increase (decrease) 1.5% when the market increases (decreases) by 1%. Similarly, a beta of 0.9 indicates that a stock’s return is expected to increase (decrease) by 0.9 of 1% when the market increases (decreases) by 1%. According to this interpretation, stocks can be divided into three group: Aggressive Share with a beta of larger than one, “market share” with a beta of being equal to one and defensive Share with a beta of less than one. The first and third group can be determined accurately, but there is no proper “market share” in market index such as FTSE100. Although we cannot find shares with exact beta of being equal to one, adding some tolerance can solve this problem. In other words, shares with beta of being approximated to 1 can be categorized into second group.
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