Editing Morningstar, Inc.
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== Notes== | == Notes== | ||
=== Investment risk === | === '''Investment risk''' === | ||
Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For example, Morningstar's beta is 1.12, and is, accordingly, 12% above the market beta (of 1); assuming that a 'low' level of riskiness is between 25% either side of the market beta, then the riskiness of investing in Morningstar is considered to be 'low' (-25%<12%>25%). | Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For example, Morningstar's beta is 1.12, and is, accordingly, 12% above the market beta (of 1); assuming that a 'low' level of riskiness is between 25% either side of the market beta, then the riskiness of investing in Morningstar is considered to be 'low' (-25%<12%>25%). | ||