Other Risk Measures

The standard deviation and coefficient of variation risk measures are based on the total variability of returns. In some situations, however, a project's total variability overstates its risk. This is because projects with returns that are less than perfectly correlated can be combined, and the variability of the resulting portfolio of investment projects is less than the sum of individual project risks. Much recent work in finance is based on the idea that project risk should be measured in terms of its contribution to total return variability for the firm's asset portfolio. The contribution of a single investment project to the overall variation of the firm's asset port-

beta

Measure of the systematic variability of one asset's returns with returns on other assets folio is measured by a concept known as beta. Beta is a measure of the systematic variability or covariance of one asset's returns with returns on other assets.

The concept of beta should be employed when the returns from potential investment projects are likely to greatly affect or be greatly affected by current projects. However, in most circumstances the standard deviation and coefficient of variation measures provide adequate assessments of risk.

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