To understand the top 10 stocks that offer the highest risk, we will look at two criteria; risk of profit (the greater the potential loss on the trade) and volatility (the greater the chance of a drop in price).
There are several factors that determine risk of profit and risk of drop. One of the most common factors (depending on your stock) is the volatility which describes how volatile a stock is.
To calculate the risk of a trade, we use the following formula;
((D_x(x) – A_x(x)) + (D_x(x)*A_x(x)) + (A_x(x)*A_x(x)) / (D_x(x)/D_x(x))
D_x is the Dow Jones Industrial Average (DJIA) and A_x is the S&P 500 (SPX). These numbers refer to the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (SP500). They are taken from the Dow Jones News service: www.dow.com/.
D_x = S&P 500 + (D_Dow(x)^2 – D_Dow(x)+0.01)
D_Dow is the Dow’s “diluted earnings” and D_Dow(x) is its earnings.
D_Dow(x)^2 is the D-E ratio
D_Dow(x) is the D-E ratio from the Financial Times
D_Dow(x) = S&P 500 + (SP500 – SP500*1/D_Dow(x))
With D_x we are looking to find the largest percentage increase for stocks over three years. We are also dealing with three years, if we look at it in one term we will see that we have only one “term” to worry about (since most companies follow the S&P 500 to its next peak; so you may not get to the highest percentage increase for long). For this calculation the above is done in periods of two year (the following terms are multiplied by the D_dow(x) ) followed by the D_Dow formula again:
D_Dow^2 = D_Dow(x) + 0.02 – D_Dow((D_Dow(x)^2 – D
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