Calculating Risk (Part 2 of 3) | Summary and Q&A

TL;DR

Learn how to measure the risk of individual stocks using a 25-point scale and 25 yes or no questions. Carter's and Virgin America are used as examples.

Key Insights

• 😃 The riskiness of individual stocks can be measured using a 25-point scale and a series of yes or no questions.
• 🥳 Factors such as competition, management, market capitalization, and financial ratios are essential in evaluating risk.
• 🍉 Insider stake and management experience can indicate long-term stability and reduce risk.
• 😘 Conscious capitalism and a low price-to-earnings ratio contribute to minimizing risk.

Transcript

so we're talking about how to measure the risk of individual stocks it's a novel thing and it's even more novel when you make it into a number so we put numbers on the risks of individual stocks and just to review a little bit about what we did last time so every stock that we rate is on a 25 point scale and the higher is the riskier so a 25-point ... Read More

Questions & Answers

Q: What is the purpose of measuring the risk of individual stocks?

Measuring the risk of individual stocks helps investors make informed decisions and assess the potential dangers and rewards associated with a specific investment.

Q: How are stocks rated on the 25-point risk scale?

Stocks are rated based on the answers to 25 yes or no questions, with higher scores indicating higher risk.

Q: Why is insider stake important in assessing risk?

Insiders with a significant stake in a company are more likely to have aligned interests with shareholders and are seen as a positive indicator of long-term stability.

Q: What does the beta rating measure?

The beta rating measures the volatility of a stock compared to the overall market. A higher beta indicates higher volatility.

Q: How does conscious capitalism contribute to reducing risk?

Companies that practice conscious capitalism, considering all stakeholders' interests, are more likely to have sustainable business models and minimize risk.

Q: How does the experience of the management team affect risk assessment?

A management team with extensive experience indicates stability and the ability to navigate challenges effectively, reducing risk.

Q: What is the significance of the stock's market capitalization in risk assessment?

Larger companies with higher market capitalization are generally considered less risky due to their greater resources and market presence.

Q: How does the price-to-earnings ratio contribute to risk assessment?

A low price-to-earnings ratio suggests that a stock may be undervalued, making it potentially less risky.

Summary & Key Takeaways

• Stocks are measured on a 25-point scale, with higher numbers indicating higher risk.

• A series of 25 yes or no questions are used to assess the risk of individual stocks.

• Last week, the first 10 questions were covered, and this week, questions 11-20 are discussed.

• Examples of two companies, Carter's and Virgin America, are used to illustrate the application of the risk measurement framework.