Risk is generally defined as return volatility, or degree of ups and downs of returns. But there's more to risk than volatility. Risk and long-term reward are generally related. Risk is chance that your actual return will be less than you expected.

People sometimes think that a good return can be achieved with little or no risk. Unfortunately, that's impossible. To achieve your objectives, you need to assume certain risks and avoid others.

Your ability to handle risk is related closely to your individual circumstances, including your age, time horizon, liquidity needs, portfolio size, income, investment knowledge, and attitude toward price fluctuations.

What's highly risky to one individual may be no problem to another. Short-term fluctuations are not that relevant for long-term investors who have discipline, patience, and understanding to deal with them. Stock funds are actually less risky than money market funds for those with long time horizons.

Well-informed investors are far less likely to let risk get best of them. Those who understand various elements of risk are better equipped to enjoy a profitable long-term investment journey!

Copyright © 2005 I.E.C. Haramis haramis@greekshares.com http://www.greekshares.com

Ioannis - Evangelos C. Haramis was born in Greece in 1951. Studied Business Administration, Marketing and Economics in Greece, USA and in Belgium.

Intrinsic Value = 4.95 x (8.5 + (2 x 10) x (4.40/5.76) = $107.77

IBM is currently trading at around $91, so it is currently slightly undervalued.

We can also do same calculation for IBM's average expected 2005 earnings of $5.62 in order to give some idea of what IBM's price should be if it meets those earnings estimates:

Intrinsic Value = 5.62 x (8.5 + (2 x 10) x (4.40/5.76) = $122.36

Of course this calculation is somewhat subjective when considered on its own. It should never be used in isolation - we must always take into account other factors such as debt/equity, cash flow, management effectiveness, prevailing economic conditions, etc. Investors should seek some qualifying criteria such as a PEG (Price Earnings Growth) ratio of less than 1 in additon to stock being undervalued based on trailing and forward intrinsic value. Be aware that PEG itself is also based on future expectations, so we have to have some degree of certainty that company will meet those expectations. We can do this by looking at last 5 years growth rate and Earnings figures.

There are, of course, other methods of calculating intrinsic value but this is certainly one of simplest.

(c) 2005 The Graham Investor - Intelligent Value Investing You may use this article, as-is, provided this copyright notice is kept intact.