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How to Measure the Risk of a Single Asset


 

What are the procedures for assessing and measuring the risk of a single asset?  When would you do this?

The various procedures are used for assessing and measuring the risk of a single asset are probability distribution, sensitivity analysis, coefficient of variation, expected return and standard deviation. 

Ø      Probability distribution: This procedure denotes the percentage chance of its outcomes. This method of assessing and measuring risk provides further insight into risk by anticipating a range of possible consequences and assigning to them different probabilities. With this procedure one can easily assess the different alternatives or results. 

Ø      Sensitivity analysis: A technique of risk analysis, which analyzes the reactivity of a standard of merit like net present value or internal rate of return to variations. This procedure measures risk of single assets by using the various ranges of potential yields. It is also used to judges the variances in the potential outcomes. 

Ø      Coefficient of variation: This procedure is used to measure a relative risk or risk per unit of expected returns. This method is mainly used for comparing asset risk i.e. larger coefficient of variation, the larger the relative risk of the specified asset or vice versa because it considers the expected value of the single asset. 

Ø      Expected return: It is defined as the sum of the product of each outcome or return and its associated probability. 

Ø      Standard deviation: The most common procedure to assess and measure risk of an asset is the standard deviation from the mean or expected value or return. It mainly measures the distribution around the expected return i.e. greater the standard deviation of returns, higher the distribution of returns, it means that the greater level of risk of the asset. 

We use these procedures at the time of purchasing or investing in the new assets in order to evaluate the possible returns and level of probability. 


 


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