Re: How safe is the stock market?
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anyone have any tips on accessing risk for a particular stock, sheerly based on it's numbers?
Like if i were to look at the financial + charts in the span of 1 minute on yahoo or google finance, what would be good indicators for a noob to look at?
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What you want to know is the volatility of a stock.
Generally, stocks with lower market caps are more prone to big swings because it takes less money to move them.
However, to actually quantify that volality is IMO impossible because investor psychology plays such a big factor in price movement.
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price change models by mandelbrot have the closest link to reality.
that is because it makes more sense that volatility scales vs. being linked by a normal distribution (as st.dev assumes). the relative probability of a 10% move vs. the probability of a 5% move should be similar to the relative probability of a .1% move vs. the probability of a .05% move.
this has held true in the empirical tests of his theory. the normal distribution has been widely defunct. it predicts something like 30 moves of >3% in a day over a century where we've had thousands of such moves in less than a century.
the problem is finding the estimates of the exponent and time factor in the power law distribution mandelbrot asserts. small changes in these estimates lead to huge chnages in results.
it isn't impossible to assess risk just because you think it is impossible to assess volatility though. that is what ranges around your inputs and monte carlo simulations are for.
Barron
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