Measuring Stock Market Risk with Correlation

Abstract

In this report, we investigate the systemic risk via capturing the correlation between the individual stocks and the market. In particular, we consider eight stocks (Microsoft, Exxon Mobil, Caterpillar, Johnson& Johnson, McDonald’s, Sandisk, Qualcomm, and Procter & Gamble) and we employ the S&P 500 as the market return. We first evaluate the risk of each individual stock using different risk metrics, e.g., variance (StD), minimax range, and Sharpe Ratio. Furthermore, we employ the regression approach (or beta method) to evaluate the correlation between each individual stock return and the market return, and also compute the R2 that measures the explainability level of the market information to each individual stock return. We conclude that Caterpillar has the largest sharpe value, and McDonald’s has the largest R square value.