{"id":651,"date":"2023-03-28T16:47:23","date_gmt":"2023-03-28T16:47:23","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/chapter\/assessing-stand-alone-risk-boundless-finance-course-hero\/"},"modified":"2023-04-03T04:04:04","modified_gmt":"2023-04-03T04:04:04","slug":"assessing-stand-alone-risk-boundless-finance-course-hero","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/chapter\/assessing-stand-alone-risk-boundless-finance-course-hero\/","title":{"raw":"Assessing Stand-Alone Risk","rendered":"Assessing Stand-Alone Risk"},"content":{"raw":"<div id=\"block_ssi-global_HeaderFragment\" class=\"\"><header class=\"gh-flex gh-justify-between gh-items-center gh-bg-white gh-py-4 gh-shadow gh-z-[1299] gh-px-16 gh-relative\">\r\n<div class=\"gh-flex gh-flex-1 gh-items-center\"><\/div>\r\n<\/header><\/div>\r\n<div id=\"block_app\">\r\n<div class=\"articleBody\">\r\n<h2>Overview of How to Assess Stand-Alone Risk<\/h2>\r\n<div class=\"articleContent\">\r\n<div class=\"boundless-concept\">\r\n\r\nTotal Beta is a measure used to determine risk of a stand-alone asset, as opposed to one that is a part of a well-diversified portfolio.\r\n<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\nDescribe different ways to assess stand-alone risks\r\n\r\n<\/div>\r\n<div class=\"textbox key-takeaways\">\r\n<h3>Key Takeaways<\/h3>\r\n<h4>Key Points<\/h4>\r\n<ul>\r\n \t<li>Appraisers frequently value assets or investments, such as closely held corporations, as stand-alone assets.<\/li>\r\n \t<li>In terms of finance, the coefficient of variation allows investors to determine how much volatility ( risk ) they are assuming in relation to the amount of expected return from an investment.<\/li>\r\n \t<li>A lower coefficient of variation indicates a higher expected return with less risk.<\/li>\r\n<\/ul>\r\n<h4>Key Terms<\/h4>\r\n<ul>\r\n \t<li><strong>correlation coefficient<\/strong>: Any of the several measures indicating the strength and direction of a linear relationship between two random variables.<\/li>\r\n \t<li><strong>probability distribution<\/strong>: A function of a discrete random variable yielding the probability that the variable will have a given value.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h3>Stand-Alone Risk<\/h3>\r\nRecall that Beta is a number describing the correlated volatility of an asset or investment in relation to the volatility of the market as a whole. However, appraisers frequently value assets or investments, such as closely held corporations, as stand-alone assets. Total Beta is a measure used to determine the risk of a stand-alone asset, as opposed to one that is a part of a well-diversified portfolio. It is able to accomplish this because the correlation coefficient, R, has been removed from Beta. Total Beta can be found using the following formula:\r\n\r\nTotal Beta =\r\n\r\n<math><semantics><mrow><mfrac><mi>\u03b2<\/mi><mtext>R<\/mtext><\/mfrac><\/mrow><annotation encoding=\"application\/x-tex\">\\frac { \\beta }{ \\text{R} }<\/annotation><\/semantics><\/math>\r\n<div class=\"latex-inline\">\r\n\r\n&nbsp;\r\n\r\n<\/div>\r\nAnother statistical measure that can be used to assess stand-alone risk is the coefficient of variation. In probability theory and statistics, the coefficient of variation is a normalized measure of dispersion of a probability distribution. It is also known as unitized risk or the variation coefficient. In terms of finance, the coefficient of variation allows investors to determine how much volatility (risk) they are assuming in relation to the amount of expected return from an investment. Volatility is measured in the form of the investment's standard deviation from the mean return, thus the coefficient of variation is this standard deviation divided by expected return. A lower coefficient of variation indicates a higher expected return with less risk.\r\n<div class=\"wp-caption aligncenter\" data-global-id=\"gid:\/\/boundless\/Image\/14744\">\r\n<div class=\"figure-cont\">\r\n\r\n[caption id=\"\" align=\"aligncenter\" width=\"563\"]<img src=\"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-content\/uploads\/sites\/128\/2023\/03\/by-log-normal-distribution1.png\" alt=\"Coefficient of Variation: The coefficient of variation, an example of which is plotted in this graph, can be used to measure the ratio of volatility to expected return.\" width=\"563\" height=\"308\" \/> <strong>Coefficient of Variation:<\/strong> The coefficient of variation, an example of which is plotted in this graph, can be used to measure the ratio of volatility to expected return.[\/caption]\r\n<p class=\"wp-caption-text\"><\/p>\r\n\r\n<\/div>\r\n<\/div>\r\nThe coefficient of variation is a dimensionless number, meaning it is independent of the unit in which the measurement has been taken. For this reason, it becomes useful to us in finance to measure the risk of an investment in a way that it is not dependent upon other types of risk, such as that of the overall market.\r\n\r\n<\/div>\r\n<h4 class=\"licensing-label\">Licenses and Attributions<\/h4>\r\n<div class=\"licensing collapsed\">\r\n<h4>CC licensed content, Shared previously<\/h4>\r\n<ul>\r\n \t<li>Curation and Revision. <strong>Provided by<\/strong>: Boundless.com. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\r\n<\/ul>\r\n<h4>CC licensed content, Specific attribution<\/h4>\r\n<ul>\r\n \t<li>probability distribution. <strong>Provided by<\/strong>: Wiktionary. <strong>Located at<\/strong>: <a href=\"https:\/\/en.wiktionary.org\/wiki\/probability_distribution\" target=\"_blank\" rel=\"license noindex nofollow noopener\">https:\/\/en.wiktionary.org\/wiki\/probability_distribution<\/a>. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\r\n \t<li>correlation coefficient. <strong>Provided by<\/strong>: Wiktionary. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\r\n \t<li>Beta (finance). <strong>Provided by<\/strong>: Wikipedia. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\r\n \t<li>Coefficient of variation. <strong>Provided by<\/strong>: Wikipedia. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\r\n \t<li>Diagram of coefficient of variation versus deviation in reference ranges erroneously not established by log-normal distribution. <strong>Provided by<\/strong>: Wikimedia. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY: Attribution<\/a>\u00a0<\/em><\/li>\r\n<\/ul>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>","rendered":"<div id=\"block_ssi-global_HeaderFragment\" class=\"\">\n<header class=\"gh-flex gh-justify-between gh-items-center gh-bg-white gh-py-4 gh-shadow gh-z-[1299] gh-px-16 gh-relative\">\n<div class=\"gh-flex gh-flex-1 gh-items-center\"><\/div>\n<\/header>\n<\/div>\n<div id=\"block_app\">\n<div class=\"articleBody\">\n<h2>Overview of How to Assess Stand-Alone Risk<\/h2>\n<div class=\"articleContent\">\n<div class=\"boundless-concept\">\n<p>Total Beta is a measure used to determine risk of a stand-alone asset, as opposed to one that is a part of a well-diversified portfolio.<\/p>\n<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<p>Describe different ways to assess stand-alone risks<\/p>\n<\/div>\n<div class=\"textbox key-takeaways\">\n<h3>Key Takeaways<\/h3>\n<h4>Key Points<\/h4>\n<ul>\n<li>Appraisers frequently value assets or investments, such as closely held corporations, as stand-alone assets.<\/li>\n<li>In terms of finance, the coefficient of variation allows investors to determine how much volatility ( risk ) they are assuming in relation to the amount of expected return from an investment.<\/li>\n<li>A lower coefficient of variation indicates a higher expected return with less risk.<\/li>\n<\/ul>\n<h4>Key Terms<\/h4>\n<ul>\n<li><strong>correlation coefficient<\/strong>: Any of the several measures indicating the strength and direction of a linear relationship between two random variables.<\/li>\n<li><strong>probability distribution<\/strong>: A function of a discrete random variable yielding the probability that the variable will have a given value.<\/li>\n<\/ul>\n<\/div>\n<h3>Stand-Alone Risk<\/h3>\n<p>Recall that Beta is a number describing the correlated volatility of an asset or investment in relation to the volatility of the market as a whole. However, appraisers frequently value assets or investments, such as closely held corporations, as stand-alone assets. Total Beta is a measure used to determine the risk of a stand-alone asset, as opposed to one that is a part of a well-diversified portfolio. It is able to accomplish this because the correlation coefficient, R, has been removed from Beta. Total Beta can be found using the following formula:<\/p>\n<p>Total Beta =<\/p>\n<p><math><semantics><mrow><mfrac><mi>\u03b2<\/mi><mtext>R<\/mtext><\/mfrac><\/mrow><annotation encoding=\"application\/x-tex\">\\frac { \\beta }{ \\text{R} }<\/annotation><\/semantics><\/math><\/p>\n<div class=\"latex-inline\">\n<p>&nbsp;<\/p>\n<\/div>\n<p>Another statistical measure that can be used to assess stand-alone risk is the coefficient of variation. In probability theory and statistics, the coefficient of variation is a normalized measure of dispersion of a probability distribution. It is also known as unitized risk or the variation coefficient. In terms of finance, the coefficient of variation allows investors to determine how much volatility (risk) they are assuming in relation to the amount of expected return from an investment. Volatility is measured in the form of the investment&#8217;s standard deviation from the mean return, thus the coefficient of variation is this standard deviation divided by expected return. A lower coefficient of variation indicates a higher expected return with less risk.<\/p>\n<div class=\"wp-caption aligncenter\" data-global-id=\"gid:\/\/boundless\/Image\/14744\">\n<div class=\"figure-cont\">\n<figure style=\"width: 563px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-content\/uploads\/sites\/128\/2023\/03\/by-log-normal-distribution1.png\" alt=\"Coefficient of Variation: The coefficient of variation, an example of which is plotted in this graph, can be used to measure the ratio of volatility to expected return.\" width=\"563\" height=\"308\" \/><figcaption class=\"wp-caption-text\"><strong>Coefficient of Variation:<\/strong> The coefficient of variation, an example of which is plotted in this graph, can be used to measure the ratio of volatility to expected return.<\/figcaption><\/figure>\n<p class=\"wp-caption-text\">\n<\/div>\n<\/div>\n<p>The coefficient of variation is a dimensionless number, meaning it is independent of the unit in which the measurement has been taken. For this reason, it becomes useful to us in finance to measure the risk of an investment in a way that it is not dependent upon other types of risk, such as that of the overall market.<\/p>\n<\/div>\n<h4 class=\"licensing-label\">Licenses and Attributions<\/h4>\n<div class=\"licensing collapsed\">\n<h4>CC licensed content, Shared previously<\/h4>\n<ul>\n<li>Curation and Revision. <strong>Provided by<\/strong>: Boundless.com. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\n<\/ul>\n<h4>CC licensed content, Specific attribution<\/h4>\n<ul>\n<li>probability distribution. <strong>Provided by<\/strong>: Wiktionary. <strong>Located at<\/strong>: <a href=\"https:\/\/en.wiktionary.org\/wiki\/probability_distribution\" target=\"_blank\" rel=\"license noindex nofollow noopener\">https:\/\/en.wiktionary.org\/wiki\/probability_distribution<\/a>. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\n<li>correlation coefficient. <strong>Provided by<\/strong>: Wiktionary. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\n<li>Beta (finance). <strong>Provided by<\/strong>: Wikipedia. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\n<li>Coefficient of variation. <strong>Provided by<\/strong>: Wikipedia. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li>\n<li>Diagram of coefficient of variation versus deviation in reference ranges erroneously not established by log-normal distribution. <strong>Provided by<\/strong>: Wikimedia. <strong>License<\/strong>: <em><a href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\" target=\"_blank\" rel=\"license nofollow noopener\">CC BY: Attribution<\/a>\u00a0<\/em><\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"author":101,"menu_order":13,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-651","chapter","type-chapter","status-publish","hentry"],"part":40,"_links":{"self":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/651","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/users\/101"}],"version-history":[{"count":5,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/651\/revisions"}],"predecessor-version":[{"id":1414,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/651\/revisions\/1414"}],"part":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/parts\/40"}],"metadata":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapters\/651\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/media?parent=651"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/pressbooks\/v2\/chapter-type?post=651"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/contributor?post=651"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.ccconline.org\/ppscacc2010principlesoffinance\/wp-json\/wp\/v2\/license?post=651"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}