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Real Questions from Real Subscribers

Q: News the U.S. will impose certain tariffs, turmoil in Italian politics, and choppy oil prices and foreign currencies have roiled markets recently, which got me thinking about the riskiness of my stocks. What’s a good way to gauge a stock’s volatility?

A: Dear Subscriber,

We calculate Risk Ratings for about 2,500 stocks. To help gauge a stock’s volatility, our ratings use five metrics: worst three-month performance in the past five years, performance in up markets, performance in down markets, standard deviation (volatility of monthly returns), and beta (sensitivity to market movement). Relative Risk scores slot stocks into five risk categories — Low, Below Average, Average, Above Average, and High.

To be sure, Low or Below-Average Risk ratings do not insulate against market moves. Moreover, the volatility of an individual stock is less important than how a portfolio stacks up on the whole. In our view, the best way to limit risk is to construct a portfolio of high-quality stocks that is diversified across most sectors. Importantly, even holding only 15 stocks, like our Focus List, can substantially reduce risk.

Thanks for your interest,

Bob Sweet, CFA
Managing Editor, Dow Theory Forecasts

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