Page 490 - Introduction to Business

464 PART 5 Finance

market risk The risk of an individual Market risk relates to the tendency of an individual firm’s bond and stock prices
firm’s stock prices going down in value to be affected by movements in the entire financial market. The Standard & Poor’s
as bond market prices move down, and
vice versa 500 (S&P 500) index represents the average return on the 500 largest U.S. firms’
stocks. When this average market index goes up or down, it is generally true that
most U.S. firms’ stock prices likewise fall or rise. Otherwise known as systematic
risk, this risk cannot be avoided by the investor. Likewise, the bond market as a
interest rate risk The risk of bond
prices moving down as the general level whole can systematically go up and down as interest rates change over time. This
of interest rates moves up, and vice interest rate risk is another type of market risk that the investor cannot control.
versa

Case in Point

Market Risk and the Stock Performance of DaimlerChrysler,
McDonald’s, and Sony

180
160
Price per share ($) 140 Sony

120
100
80
60
40 DaimlerChrysler
20
McDonald’ s
1/4
1/4
1/4
1/4 7/4 1/4 7/4 1/4 7/4 1/4 7/4 1/4 7/4 1/4/04
1/4
1999 2000 2001 2002 2003
Date
The above graph gives the stock price performance of economic recession, which was less severe in the
DaimlerChrysler, McDonald’s, and Sony from January United States and Europe than in Japan. Conse-
1999 to July 2004. Here we see that Sony’s stock quently, McDonald’s and DaimlerChrysler’s stocks
price has been much more volatile than the other two were exposed to less negative market risk than
firms over time. The price rose dramatically in 1999 Sony’s. Finally, in the second half of 2003 and early
due to an economic boom at that time. However, 2004, the stock prices of all three stocks increased as
Sony’s stock price declined thereafter and lost all of an economic recovery began to take hold. We can
the gains of 1999. One problem for Sony has been conclude that the general economy in a country or
that the Japanese economy has had difficulties in region is a powerful factor that can affect systemati-
recent years. Thus, market risk caused Sony’s stock cally stock prices of companies.
price to fall from about $150 per share in early 2000
to about $25 by mid-2004.
Over this same time period, McDonald’s and Questions
DaimlerChrysler also experienced a decrease in share 1. Why did Sony’s stock price rise dramatically in
price, but the decline was much less dramatic. 1999?
Nonetheless, the stock prices of McDonald’s and 2. Why did Sony’s stock price fall in 2000 and the
DaimlerChrysler fell by more than one-half in this years thereafter?
time period. Again, the best assessment of the reason 3. Did market risk affect the share prices of
for the decline is market risk. In the U.S. stock market, McDonald’s and DaimlerChrysler? Briefly explain
the Standard & Poor’s 500 Index (representing the in what ways.
largest 500 U.S. firms) declined from around 1600 to 4. Look up these stock prices on Yahoo Finance
about 1000 from early 2000 to mid-2004. The main (http://finance.yahoo.com). How have the stocks
reason for the general stock market decline was an performed in recent months?
Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.