A stock's contribution to the market risk of a well-diversified portfolio is called relevant risk. It can be measured by a metric called the beta coefficient, which calculates the degree to which a stock moves with the movements in the market.
What is Relevant Risk?
- Market-wide systemic risk or Relevant Risk is a given, reflecting the influence of monetary, geopolitical, and economic variables.
- Unsystematic risk, which affects a particular sector of the economy or type of security, is distinct from this sort of risk.
- Relevant Risk is frequently regarded as being challenging to avoid because it is entirely unpredictable.
- By creating a diversified portfolio, investors can partially lessen the effects of Relevant Risk.
- Other investment hazards, including industry risk, are driven by systematic risk. It is possible to diversify an investment portfolio by buying a variety of stocks in different industries, such as infrastructure and healthcare, if an investor has focused too much on cybersecurity stocks, for instance.
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