|
The concept of risk management in case of investment decision
assumes paramount importance in modern day financial management.
Though risk cannot be completely eliminated, it can be reduced
by taking precautionary measures. The risk involved in investment
is categorized in two components: systematic risk and unsystematic
risk. The comparison of the volatility to the market as
a whole is termed as systematic risk. Beta is used to measure
the systematic risk associated with the investment. Beta
is a way of telling how volatile a stock is, compared with
the rest of the market. The stability of beta is of great
concern as it is a very important tool for almost all investment
decisions and plays a significant role in risk measurement
and risk management. This paper attempts to study the stability
of beta for various stocks that formed a part of Bombay
Stock Exchange Sensitivity Index (Sensex). Stability of
beta is tested using Chow test and the result shows that
betas are unstable over time.
In the present competitive globalized business scenario,
risk is attached with every dimension. The concept of risk
management in case of investment decision assumes paramount
importance in the modern day financial management. Though
risk cannot be completely eliminated, it can be reduced
by taking precautionary measures.
Risk is the measurable uncertainty (Knight, 1921) in predicting
the future events that are affected by external and internal
factors. Sharpe (1963) had categorized risks as systematic
risk and unsystematic risk (Beja, 1972). The external factors
are the sources of systematic risk. The elements of systematic
risk are external to the firm. The examples are changes
in economic conditions, interest rate changes, inflation,
etc. On the other hand, internal factors are the sources
of unsystematic risk. Unsystematic risks are classified
as business risk or financial risk.
The systematic risk associated with the general market
movement cannot be totally eliminated through diversification.
Moreover, the degree of systematic risk is not constant
but greatly varies from company to company. The unsystematic risk, which is internal to a firm, cannot
be eliminated. However, the systematic risk, which is external
to the conditions of a firm, can be reduced to a certain
extent. Beta, which is associated with systematic risk,
helps the investor to measure the degree of risk associated
with it. In portfolio management, beta has been regarded
as the single most important aspect of risk of common stock.
Rosenberg (1985) supported the importance of beta since
it determines the systematic risk; and in a diversified
portfolio, systematic risk is the bulk of investment risk.
|
