The riskiest stock I could find…
If risk and return are directly related then the riskiest stock should provide the highest return, right?
Sounds good in theory, but what about practice? I was curious to find the riskiest stock and see how it has faired this year. I ran a stock screen that selected stocks on the basis of systematic risk as measured by beta.
Beta is a measure of risk relative to the market, so each stock’s price movements are compared to “the market.” Think of “the market” as the S&P 500. The S&P has a beta of 1.0, so riskier stocks have betas higher than one and less risky stocks have betas of less than one.
Just for a frame of reference, here are some popular companies and their respective betas: Coca-Cola (0.52), Exxon Mobil (1.14), and Merck (1.41).
My screen searched for stocks with betas of 4.0 or greater. Almost 300 stocks came back, so I refined the search to include profitable companies only. That narrowed the list to less than 50 firms. And the winner is…
UVE: Universal Insurance Holdings with a beta of 16.61.
So how is UVE performing? Down about 49 percent this year.
It appears risk and return are definitely related, but risk goes both ways. UVE is a perfect illustration of the fact that higher risk leads to a wider but not necessarily higher range of returns.
Isn’t it ironic that the riskiest company is in the business of preparing customers for risk?
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POSTED IN: Corporate, Investment, Market, Tidbits and Trivia, Uncategorized
1 opinion for The riskiest stock I could find…
moneypenny
Jun 3, 2008 at 2:42 pm
You make a good point. Risk is in the eyes of the beholder, and always open to interpretation.
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