For a bond, credit risk is unique risk, since a bond's credit rating is solely a function of the issuer's financial condition. In assessing the level of risk that is acceptable, investors must consider their investment portfolio in its entirety and understand that the risk of certain types of investments can be reduced, even significantly, through diversification. The most commonly used measure of market risk is beta. Beta is defined as a statistical measure of a security's volatility relative to the broader market. A beta higher than 1.00 means the fund should experience greater sensitivity to swings in the market, while a beta of less than 1.00 means the fund should show less sensitivity.
Unique risk is more difficult to get a handle on, but a good proxy is standard deviation.
Standard deviation shows the degree of variation in a fund's returns. Value Line measures standard deviation using monthly observations, but expresses the result on an annualized basis. Now that you understand some of the risks involved in investing, it's time to take a look at yourself and decide how much market and unique risk you can accept. That, however, will have to wait until next session. Factual material is obtained from sources believed to be reliable, but the publisher is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein.