What is risk?
In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment decision.
How is risk usually measured?
There are many tools for measuring it, but the basic ones are:
- Standard deviation
- Skewness
- Kurtosis
- Drawdown
Let's see them applied to TESLA stock
Risk analysis also is based on two fundamental concepts that is return and probability
Let's put them on a graph
This graph represents the daily performance of TESLA . We see that over a period of three years the return has fluctuated from a low of about -12% to a high of about 15%
But now I would also like to see its distribution by histogram
Histograms of daily returns are valuable to help investors to identify patterns, such as the range of daily returns of an asset over a certain period, indicating its level of stability and volatility.
In case of TESLA , we can see some extreme values that are distant from the mean,,indicating the presence of outliers in the positive and negative range of the distribution.
Now let us look at the standard deviation of Tesla , or rather its historical volatility
Historical Volatility
Standard deviation or Historical Volatility quantifies the variability of a stock's daily return .It indicates the level of risk associated with investing in that particular stock. A security with a high volatility of daily returns, characterized by a high standard deviation, is considered riskier than one with a low volatility of daily returns, represented by a low standard deviation.
TESLA is a stock with high volatility with values in the past ranging from a low of 20% to highs of more than 80%.
Not for the faint of heart
Skweness
In finance, the concept of skewness is used in analyzing the distribution of investment returns.
Positive skewness of a distribution indicates that an investor can expect frequent small losses and few large gains from the investment. Positively skewed distributions of investment returns are generally more desired by investors, as there is some likelihood of huge profits that can cover all the frequent small losses.
The 3 Year average of TESLA is positive .
Kurtosis
In finance, kurtosis is used as a measure of financial risk. A large kurtosis is associated with a high risk for an investment because it indicates high probabilities of extremely large and extremely small returns. On the other hand, a small kurtosis signals a moderate level of risk because the probabilities of extreme returns are relatively low. Kurtosis is a measure of the "tailedness" of a probability distribution. A high kurtosis indicates that the distribution has a higher probability of extreme values, or "fat tails," while a low kurtosis indicates a lower probability of extreme values, or "thin tails." This metric can be useful in risk management to identify and quantify the degree of tail risk in a portfolio or investment. A higher kurtosis value can indicate that an investment is more risky, as there is a higher probability of extreme losses.
TESLA has a kurtosis greater than 3
(Note : Python automatically calculates excess kurtosis, means the result in graph was subtracted by 3)
Historical Drawdown
Drawdown is the maximum loss a trader or an investor might experience in a given time horizon.
TESLA drawdown reached a minimum of 70%
In short : Tesla is a highly speculative stock with very high volatility and potentially high drawdowns .
As a good value investor I always stress the importance of trading or investing with serious consideration of one's margin of safety (MOS).
Consequently if in the future I wanted to decide to enter and buy TSLA , I would wait for some major correction.
