Risk usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. Jones in his book (2002; p133) said from the types of risk divided into:
- Systematic Risk
Systematic (Market) Risk is variability in a security’s total returns that is directly associated with overallmovements in the general market or economy.
Virtually all securities have some systematic risk, wheter bonds or stocks, because systematic risk encompasses interest rate, market and inflation risks. The investor cannot escape this part of the risk because no matter investor doing diversifies the risk of the overall market cannot be avoided.
- Nonsystematic Risk
Nonsystematic risk is variability in a security’s total returns not related to overall market variability. This risk is unique to a particular security and is associated with such factors as business risk, financial risk and also liquidity risk.
Although all securities tend to have nonsytematic risk, it is mgenerally connected with commonstocks.
According to www.idx.co.id, Stock price index is an indicator which shows the stock price movement.Index has a function as a market trend indicator, the index movement describes a market condition on acertain time whether the market in active or passive.
Types of indices in Indonesian stock Exchange are:
- IndividualIndex uses the price index of each stock to base price or each stock index that listed in Indonesian Stock Exchange.
- Sectored StockPrice Index uses all stocks included in each sectors (Agricultures, Basic Industries,Consumptions, Differs Industries, Finances, Infrastructures, Mining, Properties, Trading Services and Manufactures).
- Composite Stock Price Index uses all listed stocks as as component of index calculation.
- LQ45Index consists of 45 stocks with criteria applied. Those criteria are:
o Included in top 60 companies with the highest market capitalization in the last 12 months
o Included in the top 60 companies with the highest transaction value in a regular market in the last 12 months.
o Have been listed in Indonesian Stock Exchange at least 3 months.
o Having good financial conditions, prospect of growth and high transaction value and frequency.
- JakartaIslamic Index consists of 30 stocks accommodates Islamic Investment Law. Stocks with below criteria are excluded in Jakarta Islamic Index; the criteria are:
o Business or gaming with associated in gambling or restricted trading.
o Interest Profit financial institution.
o Business with produces distributes and trades food and beverage against the Islamic Law.
o Business related with produces distributes and/or provides product or services with no respect ofmoral or ruins intellect.
- BlueChip and Expansion Index, stock price index exclusively bases on the group of stocks listedin Indonesian Stock Exchange.
- Kompas100 Index, stock price index with the incorporated of Indonesian Stock Exchange and Kompas newspaper with conditions as follow:
o Listed in Indonesian Stock Exchange at least 3 months.
o Included in Composite Index (IHSG).
o Bases on the consideration of company’s fundamental factor and pattern of stocks trading.
o Includes in 150 stocks with biggest transaction value and frequency in regular market for the last 12months.
o The process as follows:
Top 60 from the 150 selected stocks with the largest transaction value will entered in the calculation of Kompas100.
Acquire 75 stocks out of 90 stocks based on regular transactions in the market.
Acquire 60 from 75 based on frequency of transactions in the market.
Select 40 stocks from 60 based on market capitalization.
The covariance is a measure of the strength of the relationship between two discrete random variables,X and Y. Levine, Stephan, Krehbiel and Berenson explained that a positive covariance indicates apositive relationship. A negative covariance indicates a negative relationship and covariance of 0indicates that the two variables are independent (2008; p184).